UNIVERSITY  OF  CALIFORNIA 
AT  LOS  ANGELES 


THE 

ARTHUR  YOUNG 

ACCOUNTING 

COLLECTION 


Graduate  School  of 
Business  Administration 

Library  of  the 

University  of  California 

Los  Angeles 


Library 

Graduate  School  of  Business  Administration 

University  of  California 

Los  Angelea  24,  California 


Principles  of 
Factory  Cost  Keeping 


BY 


EDWARD  P.  MOXEY,  JR.,  Ph.D.,  C.P.A. 

Professor  of  Accounting,  Wharion  School  of  Finance  and 
Commerce,  University  of  Pennsylvania;  Member  of  the  Firm 
of  Edward  P.  Moxey  dr»  Co.,  Certified  Public  Accountants 


(Third   Printing) 


NEW  YORK 

THE  RONALD   PRESS   COMPANY 
1919 


COPYRIGHT,  1913, 

BY 

THE  RONALD  PRESS  COMPANY 


Bus.  Admin. 
Library 

HF 
56  % 


PREFACE 

The  literature  in  which  an  activity  finds  its  ex- 
pression depends  upon  the  interest  in,  and  the 
development  of,  that  activity.  It  is  therefore  not 
surprising  to  find  that  there  is  comparatively  little 
literature  on  accounting  at  the  present  time. 
Charles  W.  Haskins  says  :  "The  literature  of  ac- 
counting  is  virtually  in  its  infancy,  awaiting  the 
fostering  care  of  cultured  authorship." 

Mr.  Haskins'  statement  is  particularly  applica- 
ble to  the  subject  of  cost  accounting.  Although 
many  valuable  articles  have  been  written  on  dif- 
ferent phases  of  this  subject,  and  while  excellent 
books  on  costs  have  appeared  from  time  to  time, 
it  is  a  notable  fact  that  such  articles  and  such 
books  have  been  either  of  a  highly  technical  char- 
acter,  or  otherwise  treating  of  special  systems  of 
costs  as  actually  installed  and  used  by  certain 
manufacturing  plants. 

As  a  result  of  this,  there  exists  in  many  minds 
the  idea  that  the  principles  of  cost  accounting  are 
more  or  less  mysterious  and  vague,  and  that  the 
subject  is  one  for  the  expert,  only  to  be  under- 

iii 

185OUO 


iv  PREFACE 

stood  after  years  of  study  and  experience.  This 
idea  is  due  largely  to  the  lack  of  a  clear  and  sim- 
ple presentation  of  the  principles  upon  which  cost 
accounting  rests;  and  it  is  to  supply  this  need 
that  the  present  book  has  been  prepared. 

The  use  of  diagrams  in  illustrating  the  princi- 
ples of  cost  accounting  is  not  new.  They  were  used 
quite  successfully  in  the  early  eighties  by  Garcke 
&  Fels  in  their  book  "Factory  Accounts" ;  but  the 
idea  has  been  further  developed  by  the  author, 
and  has  been  made  applicable  to  conditions  of 
the  present. 

The  book  is  offered  to  those  interested  along 
cost  accounting  lines,  with  the  hope  that  it  may 
help  to  a  clearer  understanding  of  the  true  aims 
of  this  important  branch  of  accounting  science. 

EDWARD  P.   MOXEY,  JR. 
October,  1913. 


CONTENTS 


Chapter  I.     Introductory 

Development  of  Accountancy 

Ends  Attained  by  Cost  Keeping 

Cost  Accounting  a  Development 

Temporary  and  Permanent  Expenditures 

Classification  of  Merchandising  Expenditures 

Analysis  of  General  Ledger 

Elements  of  Manufacturing  Cost 

Process  of  Cost  Keeping 

Relation  Between  Cost  and  General  Books 

Conversion  of  Values  in  Manufacturing 

Advantages  of  Cost  System 

Chapter  II.    Accounting  for  Stores 

Stores  Records 

Relation  of  the  Stores  Records  to  the  Commercial  Books 

Receiving  Stores 

Issuing  Stores 

The  Production  Order 

Stores  Debit  Notes 

Designating  and  Arranging  Materials 

The  Stores  Ledger 

The  Tally  Card 

Bill  of  Materials 

Keeping  Up  Stores 

Inventories 

Reconciling  Inventories 

Chapter  III.    Accounting  for  Labor 

Materials  and  Labor  Compared 

Methods  of  Recording  Time 

Piece  Work 

Towne-Halsey  Plan  of  Wage  Payment 

Taylor  Premium  Plan  of  Wage  Payment 

Time  Recording  Devices 

Recording  Labor  Costs 

Paying  the  Workmen 

General  Ledger  Labor  Account 


CONTENTS 

Chapter  IV.     Accounting  for  Indirect  Expenses 

Importance  of  Indirect  Expenses 

Methods  of  Distributing  the  Expense  Burden 

(1)  Direct  Labor  Cost 

(2)  Direct  Labor  Hour 

(3)  Material  Cost 

(4)  Prime  Cost 

(5)  Machine  Rates 
Classification  of  Indirect  Expenses 
Floor  Space 

Distributing  Floor  Space  Costs 
Power  Cost 
Machine  Cost 

Non-Productive  Supervising  Labor 
Miscellaneous  Expenses 
Distribution  of  Costs  Over  Output 
Idle  Time  Supplementary  Rate 
Idle  Capacity  Account 

Chapter  V.    Summary 
FORMS 

DIAGRAM  PAGE 

1.  Analysis    of   General    Ledger 12 

2.  Relation  of  Cost  Books  to  Commercial  Books.  15 

3.  Operations  of  a   Factory  Cost  System 20 

4.  Relation    of    Stores    Records    to    Commercial 

Records    25 

5.  Stores    Requisition 29 

6.  Stores    Ledger 34 

7.  Relation     Between    Time     Cards    and    Work 

Tickets    50 


PRINCIPLES  OF  FACTORY 
COST  KEEPING 


CHAPTER    I 
INTRODUCTORY 

Development  of  Accountancy 

Accountancy  as  a  profession  has  undergone  its 
greatest  development  within  recent  years.  Ac- 
counting records  which  a  few  years  ago  were 
either  unknown  or  were  considered  superfluous 
and  unnecessary,  are  today  an  integral  part  of  the 
accounting  systems  of  practically  every  business. 
That  portion  of  accounting  in  which  the  greatest 
advance  has  been  made  is  the  ascertaining  of  fac- 
tory costs. 

Manufacturers  used  to  consider  it  wholly  un- 
necessary to  keep  books  other  than  those  em- 
ployed to  record  the  major  business  transactions. 
The  necessity  for  an  accurate  cost  system,  which 
is  now  recognized  as  imperative  for  success  in 

7 


8  FACTORY    COST   KEEPING 

business,  was  not  then  apparent.  But  the  demand 
for  greater  efficiency  in  industry,  and  the  keen 
competition  which  exists  between  the  various 
manufacturers  in  the  same  line  of  trade,  have  ren- 
dered necessary  more  accurate  accounting  records 
whereby  each  may  know  absolutely  and  accurately 
his  cost  of  production. 

Ends  Attained  by  Cost  Keeping 

There  are  two  reasons  which  warrant  the  keep- 
ing of  cost  records  and  which  justify  the  conse- 
quent expense  involved. 

First:  Cost  keeping  furnishes  the  manufacturer 
with  accurate  and  reliable  information  concerning 
the  costs  incurred  in  production,  enabling  him  to 
fix  prices  and  bid  intelligently  against  others  in 
the  same  field. 

Second:  Through  his  cost  accounting  depart- 
ment the  manufacturer  is  enabled  to  detect,  lo- 
cate, and  eliminate  waste  or  leakage  in  materials, 
labor,  and  other  expenses  incident  to  production. 

Cost  Accounting  a  Development 

All  factory  cost  accounting  is  based  directly  on 
the  principles  of  double-entry  bookkeeping.  It  is, 
in  fact,  a  highly  specialized  development  of  dou- 


ble-entry  bookkeeping — which  does  not,  in  its 
usual  form,  go  far  enough  for  cost  accounting 
purposes. 

In  the  ordinary  routine  of  business,  money,  or 
its  equivalent,  is  paid  in  for  the  purpose  of  making 
a  profit  by  increasing  its  amount  through  the 
operation  of  the  business.  It  is  obvious  that  in 
order  to  secure  this  increase  the  money  must  first 
be  expended,  the  expenditure  being  always  made 
with  the  expectation  that  there  will  be  produced 
something  which  can  be  sold  to  the  consumer  for 
an  amount  greater  than  the  cost  to  the  producer. 
The  difference  between  the  costs  of  production 
added  to  the  other  expenses  of  the  business  and 
the  amount  received  from  sales  represents  profit. 

But  a  system  of  accounting  that  did  not  go  be- 
yond this  elementary  presentation  of  facts  would 
not  furnish  information  sufficient  or  accurate 
enough  for  the  requirements  of  modern  business. 
Some  classes  of  expense  are  not  of  a  temporary 
nature.  The  use  of  certain  articles  in  production 
— such  as  machinery — extends  over  a  series  of 
years.  It  is  not  right  to  charge  the  original  cost 
of  such  purchases  to  profit  and  loss  in  the  period 
in  which  they  are  made,  for  they  will  figure  in  the 
manufacture  of  hundreds  of  subsequent  lots  of 
goods. 


10  FACTORY   COST   KEEPING 

Temporary  and  Permanent  Expenditures 

For  cost  accounting  purposes,  therefore,  a  first 
distinction — considering  expenditures  only  for  the 
present — must  be  made  between  expenditures  for 
assets  of  a  more  permanent  type — generally 
known  as  fixed  assets,  and  comprehended  in  the 
term  "Plant" — and  those  of  a  more  or  less  tem- 
porary character,  known  as  "Profit  and  Loss" 
items,  or  those  comprehended  in  the  general  class 
of  "Nominal  Accounts." 

Classification  of  Merchandising  Expenditures 

Following  this  a  more  detailed  classification  be- 
comes desirable.  Taking  a  merchandising  concern 
for  the  sake  of  illustration,  we  find  that  "Profit 
and  Loss"  expenditure  is  divided  into  two  parts, 
the  distinguishing  feature  being  the  difference  be- 
tween payments  for  that  which  is  dealt  in,  classi- 
fied under  the  heading  "Merchandise,"  and  pay- 
ments for  services  and  other  items  necessary  to 
the  proper  conduct  of  the  business,  known  as 
"General  Expense." 

A  further  subdivision  of  "General  Expense" 
must  then  be  made  to  show  the  items  which  make 
up  its  total  amount.  Two  subheadings,  known 
respectively  as  "Trading  Expense"  and  "Adminis- 


INTRODUCTORY  11 

trative  Expense,"  are  usually  employed.  The 
former  covers  the  detailed  expense  accounts 
which  go  to  make  up  the  cost  of  distributing  the 
goods,  including  salesmen's  salaries  and  expenses, 
rent  of  the  store  in  the  case  of  a  merchandising 
house,  costs  of  advertising  and  of  the  delivery 
service;  while  the  latter  includes  those  accounts 
which  show  the  cost  of  managing  the  financial 
and  business  affairs  of  the  concern,  including  all 
administrative  salaries  and  general  office  expense, 
such  as,  for  example,  office  supplies. 

On  the  other  hand,  "Merchandise,"  being  en- 
tirely too  general  in  its  character,  is  also  subdi- 
vided. The  first  distinction  is  that  made  between 
purchases  and  sales.  The  sales  may  also  be  di- 
vided into  classified  sales  accounts,  while  in  the 
division  of  the  purchases  we  find  the  first  signs 
of  detailed  costs. 

Analysis  of  General  Ledger 

The  following  analysis  of  the  general  ledger  of 
any  typical  merchandising  business,  from  the 
standpoint  of  expenditures,  will  serve  to  present 
diagrammatically  the  discussion  up  to  this  point: 


12 


FACTORY   COST   KEEPING 


*    c 
>    a 


li! 


o  j» 


3-5 
<  = 


INTRODUCTORY  13 

Elements  of  Manufacturing  Cost 

If,  instead  of  purchasing  the  goods  ready  for 
sale,  as  we  have  presumed  heretofore,  a  manufac- 
turing plant  is  erected  or  leased  and  the  goods 
are  produced,  it  becomes  necessary  to  split  up  the 
expenditures  directly  involved  in  the  production 
of  these  goods  into  their  component  parts,  which 
together  compose  manufacturing  costs.  These 
component  parts  of  manufacturing  cost  may  be 
grouped  under  three  headings: 

(1)  Materials 

(2)  Labor  used  directly  in  production 

(3)  Indirect  expenses,  or  overhead  costs 

The  details  of  manufacturing  or  production 
cost,  composed  of  the  classes  of  expenses  stated 
above,  are  shown  by  the  factory  cost  books.  The 
costs  appearing  in  detail  in  the  cost  books  are  en- 
tered in  total,  at  stated  periods,  in  the  general 
ledger. 

Process  of  Cost  Keeping 

The  main  steps  in  manufacturing  for  which  an 
accurate  accounting  must  be  made  are  as  follows: 

(i)  The  purchase  and  storing  of  materials  and 
supplies  and  their  issuance  to  the  producing  de- 
partments as  required. 


14  FACTORY   COST   KEEPING 

(2)  The      manufacturing      processes      through 
which  the  product  must  pass,  the  accounting  for 
which  involves  not  only  the  cost  of  materials  con- 
sumed, but  also  the  direct  labor  cost,  and  a  cer- 
tain amount  of  the  indirect  expenses,  applied  to 
each  unit  of  production. 

(3)  The  storage  and  issuance  of  finished  stock. 

Relation  Between  Cost  and  General  Books 

Corresponding  to  each  of  these  divisions,  we 
have  certain  factory  cost  books,  i.  e.,  the  "Stores 
Ledger,"  the  "Cost  Ledger,"  and  the  "Stock 
Ledger."  The  relation  of  these  cost  books  to  the 
general  commercial  books  is  shown  by  the  diagram 
on  page  15. 

In  explanation  of  this  diagram  and  to  illustrate 
the  operation  of  the  books,  let  us  suppose  thai  a 
certain  sum  of  money  is  disbursed  for  the  pur- 
chase of  materials,  labor,  and  other  supplies  and 
services  connected  with  the  production  of  the 
goods.  This,  in  the  ordinary  journal  form,  would 
be  represented  by  the  entry: 

Materials  \ 

Labor  I  Dr. 

Indirect  Expense  ) 

To  Cash  Cr. 


INTRODUCTORY 


15 


a 


16  FACTORY   COST  KEEPING 

By  this  entry  the  accounts  costing  the  business 
value  are  debited,  and  the  account  which  has  pro- 
duced value,  viz.,  cash,  is  credited.  In  a  small 
business  this  method  of  accomplishing  the  result 
might  be  satisfactory.  In  a  large  business,  how- 
ever, there  are  numerous  transactions  involving 
these  accounts  which  occur  every  business  day. 
If  these  were  to  be  separately  recorded  in  the 
journal,  the  work  required  and  the  expense  in- 
volved would  be  out  of  all  proportion  to  the  re- 
sults obtained.  To  avoid  this  labor,  transactions 
of  a  similar  nature,  when  there  are  many  of  them, 
are  brought  together  in  one  subsidiary  record, 
and  the  totals  only  are  posted  to  the  ledger.  Thus 
there  is  usually  a  book  devoted  to  the  detailed 
recording  of  cash  receipts  and  payments,  while 
the  general  ledger  cash  account  is  concerned 
merely  with  the  totals.  Likewise  the  "Stores 
Ledger"  contains  a  number  of  accounts — usually 
kept  upon  cards  for  convenience  in  handling,  or 
else  in  loose-leaf  books — whose  totals  appear  in  a 
general  ledger  "Stores"  account.  If,  then,  a  cer- 
tain amount  of  money  should  be  paid  out  for  the 
purchase  of  stores,  the  cash  book  entry  expressing 
such  transaction  is  as  follows: 

Stores  or  Materials,  Dr. 

To  Cash      Cr. 


INTRODUCTORY  17 

Both  the  stores  item  and  the  cash  item  find 
cheir  way  to  the  general  ledger  in  totals.  The 
stores  item  also  appears  in  the  stores  ledger  in 
detail,  being  taken  from  the  original  purchase 
invoices.  When  the  stores  purchased,  after  hav- 
ing been  received  and  placed  in  the  storeroom, 
are  requisitioned  and  delivered  to  the  producing 
departments,  there  must  be  a  credit  to  the  Stores 
account  for  the  value  of  the  quantity  delivered. 
This  credit  is  offset  by  a  debit  to  the  general 
ledger  account  which,  controls  the  costs  of  goods 
in  process — designated  on  the  diagram  as  "Manu- 
facturing Account." 

In  the  course  of  a  day,  the  stores  issued  to  the 
producing  departments  will  be  consumed  on  many 
orders  in  process,  so  that  from  the  factory  stand- 
point it  will  be  necessary  to  make  entries  in  each 
of  the  individual  cost  accounts  representing  the 
orders  in  process.  The  aggregate  of  the  material 
costs  so  assigned  appears  in  the  general  ledger  in 
the  Manufacturing  account,  for  it  must  be  borne 
in  mind  that,  generally  speaking,  a  system  of  fac- 
tory accounting  does  not  reach  its  highest  effi- 
ciency unless  there  is  this  control  exercised  by 
the  general  ledger  over  the  balances  of  the  sub- 
sidiary ledgers. 

When    the    goods   are   finished    they    must    be 


18  FACTORY   COST  KEEPING 

transferred  on  the  books  to  the  finished  stock  de- 
partment. This  is  conveniently  accomplished 
through  the  medium  of  a  voucher  designated  as 
"Stock  Debit  Note."  There  will,  of  course,  be 
many  orders  continually  passing  through  the 
manufacturing  processes  into  the  finished  stock 
department.  The  subsidiary  book  entries  which 
record  the  finished  orders  so  transferred  serve  to 
credit  the  cost  account  representing  each  order  in 
the  cost  ledger,  and  to  debit  in  the  stock  ledger 
the  particular  finished  goods  account  to  which 
the  goods  belong. 

As  in  the  case  of  the  issuance  of  stores,  so  in  the 
case  of  the  transference  of  finished  stock  from  the 
factory,  there  must  be  an  entry  on  the  general 
books  to  record  such  transfer.  This  entry  deals 
with  the  totals  of  the  corresponding  entries  in 
the  subsidiary  books,  and  its  effect  is  to  debit 
Finished  Goods  account  in  the  general  ledger,  and 
credit  Manufacturing  account. 

All  finished  goods  on  hand  are  usually  available 
for  sale.  As  soon  as  an  order  is  received  from  a 
customer  for  the  delivery  of  a  certain  kind  and 
quantity  of  goods,  entries  must  be  made  in  the  stock 
ledger  crediting  the  account  to  which  the  goods  were 
charged  when  they  were  placed  in  finished  stock,  and 
a  similar  entry — in  totals — crediting  Finished  Goods 


INTRODUCTORY  19 

account  in  the  general  ledger.  The  goods  which 
have  been  sold  are  debited  to  an  account  in  the 
general  ledger  which  may  be  designated  as  "Cost 
of  Sales." 

Accompanying  each  shipment  of  goods  there  is  a 
"Sales  Invoice,"  on  which  appears  the  price  at  which 
the  goods  are  charged  to  the  customer  and  the  total 
amount  of  the  sale.  A  record  of  each  sale  is  made 
in  a  sales  book,  debiting  the  account  of  the  customer 
and  crediting  the  Sales  account — in  totals — with  the 
selling  price.  The  difference  between  the  cost  of 
goods  sold  and  the  amount  charged  to  customers 
as  shown  by  the  Sales  account  must  therefore  be  the 
gross  manufacturing  profit.  When  money  is  re- 
ceived from  the  customer  in  payment  of  his  account, 
there  is  a  debit  to  cash  for  the  amount  paid,  off- 
setting a  credit  to  the  customer's  account. 

Conversion  of  Values  in  Manufacturing 

The  progress  of  factory  work  as  it  appears  in 
the  books  may  be  illustrated  by  the  diagram  on 
page  20,  which  shows  the  operation  of  a  factory 
cost  system  from  the  time  payment  of  cash  is  made 
to  begin  production  until  the  goods  have  been  com- 
pleted and  are  available  for  sale. 

Advantages  of  Cost  System 

The  manufacturer  who  has  his  factory  cost  system 


20 


FACTORY   COST   KEEPING 


Distribution  by 
various  r/ethods 


Merchandise  Orders 


Sales  Invoices 


NOTE — The  difference  between  the  total  Merchandlw  Orders  appearing  en  the 
Debit  side  of  the  Trading  Account  and  the  Sales  Invoices  represents 
gross  manufacturing  profit. 


INTRODUCTORY  21 

arranged  on  this  general  plan  is  in  a  position  en- 
abling him  to  adjust  his  selling  prices  so  as  to  bring 
to  him  the  largest  amount  of  profit. 

He  possesses  a  cost  system  organized  along  the 
same  lines  as  his  system  of  factory  management;  a 
system  economical  of  operation,  accurate  in  its 
results  as  to  current  operations,  and  one  from  which 
estimates  or  bids  on  future  work  can  be  accurately 
and  quickly  made.  By  a  subdivision  of  his  sales 
account  into  the  different  classes  or  grades  of  goods 
manufactured,  and  by  carrying  corresponding  cost 
accounts,  he  can  accurately  determine  the  cost  of 
producing  each  line  of  goods  and  the  profit  or  loss 
on  each  grade  sold. 

We  have  seen  that  the  factors  which  enter  into 
the  manufacturing  cost  of  any  product  can  be 
grouped  under  the  main  headings  of  "Stores," 
"Direct  Labor,"  and  "Indirect  Expenses."  We  are 
now  in  a  position  to  take  up  each  of  these  in  the 
order  given,  and  to  show  the  method  of  determining 
the  amount  and  value  of  each.  At  the  same  time, 
we  shall  see  how  to  detect  and  prevent  waste  and 
leaks,  which  are  important  items  to  the  manufacturer 
from  the  standpoint  of  profits. 


Stores  Records 

Subsidiary  records  constitute  one  of  the  distinctive 
features  of  a  really  effective  system  of  cost  account- 
ing. The  difference  between  modern  systems  of 
factory  cost  keeping  and  a  system  of  accounts  not 
including  subsidiary  cost  records,  can  be  clearly 
shown  by  the  respective  methods  of  handling  stores. 

In  a  business  which  does  not  keep  stores  records, 
the  inventory  at  the1  beginning  of  the  period  is  used 
as  a  starting  point  in  order  to  find  the  cost  of  mate- 
rials consumed.  To  this  amount  is  added  the  cost 
of  the  purchases  during  the  period,  which  gives  the 
total  amount  available  for  that  period.  If  from  this 
amount  there  is  deducted  the  value  of  the  materials 
on  hand  at  the  end  of  the  period — ascertained 
through  actual  inventory  of  the  stock  on  hand  at 
that  time — the  difference  is  supposed  to  be  the  cost 
of  the  materials  consumed.  Whether  this  is  true  or 
not  depends  on  the  accuracy  of  the  inventories,  and 

22 


ACCOUNTING  FOR  STORES  23 

on  the  absence  or  presence  of  leaks  resulting  in 
shortages  of  material  during  the  period.  It  is  as  if 
a  man  starting  out  with  $100  in  money,  and  receiv- 
ing during  a  given  year  $1,200  more — having  thus 
$1,300  to  spend — should  keep  no  account  of  his 
expenditures,  but,  taking  count  of  his  money  at 
the  end  of  the  period,  and  finding  that  he  has  on 
hand  $300,  should  conclude  that  he  has  paid  out 
$1,000  during  the  year.  Certainly  $1,000  has  gone 
in  some  way ;  but  whether  he  has  actually  spent  that 
amount  and  received  value  for  it  cannot  be  deter- 
mined— it  can  only  be  inferred.  Under  this  method 
there  is  no  means  whatever  of  knowing  whether  or 
not  any  moneys  have  been  stolen  or  lost. 

An  accurate  cost  system,  however,  does  not  work 
on  a  basis  of  conjecture  or  inference.  Starting  with 
the  inventory  at  the  beginning  of  the  period,  the 
cost  of  all  purchases  is  added  to  this,  and  a  careful 
account  is  kept  of  the  consumption  during  the  same 
time.  The  balance  of  the  accounts  at  the  end  of  the 
period  then  shows  the  amount  which  should  be  on 
hand,  and  whether  or  not  this  is  actually  so  can  be 
ascertained  through  a  physical  inventory.  If  the 
"book  inventory"  and  the  actual  inventory  do  not 
agree,  something  is  wrong,  and  it  must  be  traced 
down.  If  they  do  agree,  the  presumption  is  that 
there  have  been  no  leaks  or  other  losses. 


24:  FACTORY   COST  KEEPING 

The  difference  in  the  two  methods  can  be  shown 
by  the  same  illustration  which  we  gave  before.  If 
our  man  starting  out  with  $100  at  the  beginning  of 
the  year  should  receive  during  the  year  $1,200,  and 
should,  during  the  same  period,  actually  account  for 
payments  of  $1,000,  then,  by  a  count  of  the  money 
on  hand  at  the  end  of  the  year,  he  can  ascertain 
whether  or  not  the  amount  called  for  by  his  record 
(viz. :  $300)  is  in  agreement  with  the  actual  money 
on  hand.  If  it  is,  he  knows  there  have  been  no  leaks. 
If  it  is  not,  he  is  immediately  put  upon  inquiry. 

Relation  of  the  Stores  Records  to  the  Commercial 
Books 

If  we  keep  in  mind  that  any  system  of  accounting 
for  stores  must  provide  an  accurate  method  of 
measuring  not  only  the  purchases  but  the  amount  of 
stores  consumed,  we  can  better  understand  the  rela- 
tion of  the  stores  records  to  the  general  commer- 
cial books,  which  is  shown  by  Diagram  4.  This 
differs  from  Diagram  2.  in  showing  the  stores  records 
only  and  giving  these  in  much  greater  detail. 

Receiving  Stores 

The  accounting  methods  employed  in  receiving 
materials,  as  graphically  shown  in  Diagram  4,  can 
be  illustrated  as  follows  : 

Starting  from  the  purchase  invoice  which  accom- 


ACCOUNTING  FOR  STORES 


25 


<5 

ii 


1 


.1 


26  FACTORY   COST  KEEPING 

panics  all  goods  received,  an  entry  is  made  in  the 
purchase  book,  or  in  its  equivalent,  the  voucher 
register — according  to  the  character  of  the  record 
kept — the  ultimate  effect  of  which  is  to  debit  the 
general  ledger  account  of  "Stores"  and  give  credit 
to  the  party  from  whom  the  goods  have  been  pur- 
chased. Of  course  there  would  be  no  economy  in 
keeping  the  purchase  book  if  every  purchase  were 
posted  to  the  general  ledger  as  soon  as  it  had  been 
recorded  therein,  so  the  bookkeeper  usually  waits 
until  the  end  of  the  month.  He  then  makes  his  post- 
ings by  totaling  the  columns  of  the  purchase  book, 
and  posting  to  the  debit  side  of  the  Stores  account 
in  the  general  ledger  the  total  cost  price  of  all  goods 
purchased  during  the  month,  an  equivalent  credit 
at  the  same  time  being  posted  to  the  "Accounts 
Payable"  account,  which  in  like  manner  controls  the 
individual  accounts  of  the  creditors — kept  in  a 
creditors'  ledger,  not  shown  on  the  diagram.  The 
creditors'  ledger,  which  is  subsidiary  to  the  general 
ledger,  is  posted  daily  from  the  purchase  and  cash 
books.  The  reason  for  this  is  that  the  bookkeeper  is 
enabled  thereby  to  ascertain  at  all  times  the  exact 
status  of  each  creditor's  account,  without  the  neces- 
sity of  posting  the  general  ledger. 

In  the  stores  department,  each  purchase  invoice — 
after  being  checked  up  with  the  goods  which   it 


ACCOUNTING  FOR  STORES  27 

accompanies — is  entered  in  a  "Stores  Received 
Book,"  from  which  it  is  posted  to  the  debit  side  of 
its  proper  account  in  the  "Stores  Ledger."  Often- 
times it  happens  that  the  materials  received  are  not 
up  to  the  required  standard,  so  that  some  of  them 
must  be  returned  to  the  vendors.  In  such  a  case 
it  is  better  to  allow  the  original  invoice  to  go 
through  in  the  ordinary  way,  and  then,  on  the  basis 
of  a  "credit  memo,  for  goods  returned,"  to  make 
a  record  through  both  commercial  and  factory  books, 
reversing  in  part  the  entries  made  at  the  time  of 
purchase.  On  the  commercial  side,  an  entry  is  made 
in  a  "Returns  and  Allowances  Book,"  the  effect  of 
which  is  to  debit  the  account  of  the  creditor  and 
credit  the  "Stores"  account.  In  the  stores  depart- 
ment, an  entry  is  made  in  the  "Stores  Rejected 
Book,"  from  which  it  is  posted  to  the  stores  ledger 
as  a  credit  to  the  material  accounts  concerned. 

Issuing  Stores 

Having  traced  the  materials  coming  in  from  and 
returning  to  outside  parties,  let  us  now  take  up  the 
materials  as  they  are  issued  from  stores  for  use  in 
the  producing  departments.  The  vouchers  on  which 
all  stores  are  issued  originate  in  the  producing 
departments,  or  else  in  the  cost  office.  They  are 
known  by  several  different  names,  but  "Stores 


28  FACTORY  COST  KEEPING 

Requisition"  is  a  common  term.     A  specimen  of 
such  requisition  is  submitted  on  page  29. 

As  the  stores  requisitions  are  presented  to  the 
storekeeper,  he  issues  the  materials  called  for,  ascer- 
tains the  price  of  the  goods,  and  extends  the  amount 
on  the  requisition.  Entry  is  then  made  by  him  in 
the  "Stores  Issued"  book,  from  which  postings  are 
made  to  the  credit  side  of  the  various  stores  accounts 
involved.  At  stated  periods,  generally  monthly,  the 
storekeeper  renders  his  report  to  the  general  office, 
showing  the  numbers  of  the  stores  requisitions  hon- 
ored by  him  during  the  period,  together  with  the 
money  value  of  the  stores  issued  on  each.  The  total 
of  this  report  is  the  basis  for  a  journal  entry  which 
debits  Manufacturing  account  and  credits  Stores 
account  in  the  general  ledger. 

The  Production  Order 

A  "Production  Order"  is  a  formal  written  or 
printed  order  used  by  manufacturing  concerns  to 
authorize  definitely  the  manufacture  of  the  specified 
goods  or  articles.  To  ascertain  accurately  the  cost 
of  each  order  or  lot  of  goods,  a  production  order 
account  is  opened  in  the  cost  ledger  for  each  and 
every  order.  These  accounts  are  usually  designated 
by  numbers  corresponding  to  the  numbers  of  the 
production  orders. 


ACCOUNTING  FOR  STORES 

COST    DEPARTMENT 
STORES    REQUISITION 


No 


Use  this  Requisition  to  report  stores  withdrawn  or  returned  to  store- 
room, blacksmith  store  or  any  other  shop  store. 


PIECES 

MATERIAL 

DESCRIPTION  OF  ARTICLES 
OR  WORK 

WEIGHT 

PRICt 

AMOUNT 

Material  Received  by  Order  No  

Material  Delivere 
Credit 

d  by 

te 

Stock  Clerk. 

Charge 
Charae 

Diagram  5.     Stores  Requisition. 


30  FACTORY   COST  KEEPING 

As  the  work  of  manufacturing  progresses,  all 
materials  requisitioned  for  a  particular  order  are 
charged  to  its  account,  as  is  also  all  labor  expended 
on  it,  and  its  proportionate  part  of  the  overhead 
charges.  Thus  it  is  possible,  when  the  goods  are 
finished,  to  tell  their  cost  by  the  debit  balance  in  the 
corresponding  production  order  account. 

Stores  Debit  Notes 

It  happens  sometimes  that  stores  are  issued  in 
excess  of  the  requirements  of  the  order.  In  such 
cases  it  would  not  be  right  to  use  the  surplus  on 
another  order  without  first  making  the  necessary 
adjusting  entries  on  the  books.  Otherwise  it  is 
plain  that  the  original  order  would  be  charged  with 
more  than  its  share  of  the  material  cost.  Therefore, 
to  keep  the  records  in  agreement  with  the  facts,  a 
"Stores  Debit  Note,"  or  similar  device,  is  used  to 
return  to  stores  such  materials  as  may  have  been 
issued  in  excess  of  the  requirements  of  any  one  order 
in  process.  These  notes  are  turned  in  to  the  store- 
keeper and  are  entered  by  him  in  a  "Stores  Returned 
Book,"  from  which  they  are  posted  to  the  debit  side 
of  the  stores  ledger  accounts  involved.  The  general 
effect  on  the  storekeeper's  records  is  to  increase  the 
amount  of  material  shown  to  be  on  hand  in  the 
accounts  affected  by  the  returns.  On  the  commer- 


ACCOUNTING  FOR  STORES  31 

cial  side  a  journal  entry  is  made — usually  covering 
all  notes  issued  during-  a  month — which  debits 
"Stores"  and  credits  "Manufacturing"  in  the  general 
ledger. 

Designating  and  Arranging  Materials 

In  devising  a  system  of  accounts  'for  a  storeroom 
it  is  of  prime  importance  that  some  method  of 
designating  goods  subject  to  requisition  be  adopted 
which  shall  be  short  and  accurate,  and  at  the  same 
time  provide  a  means  of  quickly  rinding  the  various 
accounts  in  the  stores  ledger.  In  order  to  accom- 
plish this,  various  systems  of  account  numbers  are 
used,  so  as  to  avoid  a  long  detailed  description  of 
each  kind  of  material  handled,  special  numbers  or 
letters  being  associated  with  each  stores  account. 

One  of  the  best  systems  of  account  numbers  in 
use  is  that  known  as  the  decimal  system,  which  is 
the  invention  of  Melvil  Dewey,  formerly  Director 
of  the  New  York  State  Library.  As  the  name  of 
the  system  implies,  it  is  founded  on  the  use  of  the 
decimal  point.  All  figures  to  the  left  of  the  point 
refer  to  the  various  major  classes  of  materials 
handled.  For  instance,  if  the  plant  uses  not  more 
than  nine  main  classes  of  materials,  then  to  each 
class  is  assigned  a  single  place  number.  If  there 
should  be  more  than  nine  general  classes,  then  the 


32  FACTORY   COST   KEEPING 

numbers  indicating  them  should  run  from  I  to  99, 
two  places  instead  of  one  being  assigned  to  the  main 
classification.  Numbers  to  the  right  of  the  decimal 
point  indicate  the  size,  grade,  etc.,  of  the  material 
called  for  by  the  number  to  the  left.  As  there  is  a 
possibility  that  the  point  may  be  omitted  or  over- 
looked in  posting,  some  manufacturers  use  an  o  in 
its  place. 

In  those  cases  where  the  kinds  of  materials  are 
so  many  that  they  cannot  readily  be  covered  by  a 
series  of  numbers,  a  modification  of  the  decimal 
system  may  be  used.  This  modification  consists  in 
assigning  letters  to  the  major  classes  of  materials, 
and  indicating  the  character  of  such  materials  by 
numbers  to  the  left  of  the  decimal  point  or  cipher, 
while  numbers  to  the  right  are  devoted  to  the  size, 
grade,  etc. 

To  illustrate  the  working  of  this  system,  suppose 
the  letter  "A"  is  used  to  indicate  a  general  class  of 
iron,  while  the  number  "3"  represents  the  subclass 
of  rivets.  Then,  if  we  indicate  the  length  of  the 
rivet  by  the  first  number  to  the  right  of  the  decimal 
point  or  cipher,  while  the  second  number  shows  the 
thickness,  and  the  third  number  the  character  of  the 
head,  we  can  represent  iron  rivets,  two  inches  long 
by  five-eighths  of  an  inch  thick,  with  round  heads, 
by  the  following  simple  number :  A3o642.  Here  we 


ACCOUNTING  FOR  STORES  33 

use  o  in  place  of  the  decimal  point,  and  do  not  use  the 
figures  to  the  right  in  their  ordinary  numerical 
significance,  but  according  to  a  prearranged  code. 
The  advantages  of  such  a  system  can  hardly  be  over- 
estimated. It  saves  time  and  space,  and  avoids,  in 
great  measure,  clerical  errors.  The  system  as  out- 
lined is  elastic,  and  can  be  used  in  cases  where  the 
material  is  divided  into  a  few  classes,  as  well  as 
in  those  where  the  material  is  very  complex  and  the 
number  of  classes  is  consequently  enormously 
increased. 

If,  finally,  the  material  is  arranged  in  the  store- 
room in  a  definite  order,  corresponding  to  the  ac- 
count numbers,  the  economy  is  apparent  in  the 
promptness  with  which  it  can  be  found  and  issued 
when  called  for,  and  the  ease  with  which  an  inven- 
tory can  be  taken. 

The  Stores  Ledger 

Having  our  material  properly  arranged  and  the 
account  numbers  assigned,  the  form  of  the  stores 
ledger  account  is  next  to  be  considered.  In  speaking 
of  the  stores  ledger  we  must  not  have  in  mind  a 
bound  book  with  ruling  similar  to  that  of  the 
ordinary  double-entry  ledger,  but  a  loose-leaf  file,  or 
more  frequently  a  card  ledger.  A  typical  stores 
ledger  sheet  or  page  is  illustrated  by  the  following: 


34 


FACTORY   COST  KEEPING 


w 


11 


Mi 


ACCOUNTING  FOR  STORES  35 

It  will  be  noticed  that  space  is  provided  for  the 
account  number — or,  as  it  is  sometimes  expressed, 
the  stores  symbol — also  for  the  description  of  the 
article,  together  with  the  quantity  to  be  kept  on 
hand.  This  latter  varies  with  the  demands  of  the 
business,  and  is  determined  by  the  purchasing  de- 
partment. In  some  industries  it  is  necessary,  in 
order  to  provide  properly  for  work  in  advance  of 
the  demand,  that  certain  materials  be  apportioned  or 
set  aside  out  of  stores.  In  cases  of  this  kind  a 
stores  apportioned  column  is  used,  and  as  stores  are 
apportioned  they  are  deducted  from  the  available 
stores,  and  placed  in  the  apportioned  column.  The 
several  columns  of  the  account  will  then  show  at 
all  times  the  balance  of  stores  ordered  and  not  yet 
delivered,  stores  on  hand  in  the  storeroom,  stores 
apportioned,  and  stores  available.  A  reading  of  the 
instructions  appearing  at  the  top  of  the  stores  sheet 
will  give  a  good  idea  of  the  method  of  handling 
materials  received  and  issued. 

The  Tally  Card 

In  connection  with  the  stores  ledger  card  or  sheet 
the  "tally  card"  is  used.  This  is  a  card  or  tag  which 
is  attached  to  each  shelf  or  bin  containing  materials, 
one  card  being  devoted  to  each  kind  of  material.  As 
material  is  placed  in  the  bin  or  on  the  shelf,  notation 


36  FACTORY   COST  KEEPING 

should  be  made  on  the  tally  card,  and  as  material  is 
taken  out  note  should  also  be  made.  The  balance 
of  the  tally  card,  which  is  kept  by  quantities  only,, 
should  be  in  accord  with  the  stock  on  hand,  and  also 
in  balance  with  the  quantities  called  for  by  the  stores 
ledger  account. 

Bill  of  Materials 

In  order  that  the  storekeeper  shall  have  on  hand 
sufficient  materials  for  issuance  to  the  producing 
departments  when  requisitions  are  presente.d,  he 
should  be  informed  in  advance  of  the  probable 
requirements.  In  some  concerns,  as  soon  as  an 
order  is  received  which  calls  for  production,  a  bill 
of  materials  is  prepared  showing  the  total  require- 
ments from  stores.  A  copy  of  this  is  sent  to  the 
storekeeper  so  that  he  may  have  opportunity, 
through  requisition  on  the  purchasing  department, 
to  provide  any  materials  lacking. 

Keeping  Up  Stores 

As  regards  the  handling  of  stores  Mr.  John  R. 
MacNeille*  says :  "When  the  business  is  well  estab- 
lished and  the  sales  are  fairly  closely  estimated  as 
to  their  quantity,  it  is  possible  to  establish  an  'order 
quantity'  for  the  material  used  in  the  factory  toward 


•Business  World. 


ACCOUNTING  FOR  STORES  37 

the  production  of  the  finished  product.  This  order 
should  designate  specifically  a  certain  quantity  to 
be  ordered  of  the  material  in  question  at  each  order 
period,  or  at  any  time  when  the  stock  in  question 
reaches  a  minimum,  or  reaches  the  order  limit.  Some 
concerns  designate  it  as  the  'low'  limit.  In  cases 
where  it  is  possible  to  establish  an  'order  quantity,' 
record  should  be  made  of  this  on  the  tally  record 
and  on  the  ledger  card,  which  should  also  indicate 
the  low  limit  of  the  stock  of  that  particular  shelf  or 
bin.  Under  these  conditions  ordering  becomes  very 
simple,  the  storekeeper  having  only  to  make  out  the 
requisition  on  a  list  or  an  individual  slip,  or  the 
standard  order,  whenever  stock  on  hand,  as  shown 
by  the  tally  card  and  as  verified  by  the  quantity  on 
the  shelf  or  in  the  bin,  approaches  the  low  or  mini- 
mum limit. 

"Where  it  is  impracticable  to  establish  arbitrary 
amounts  for  reordering,  it  is  always  desirable,  and, 
generally  speaking,  practical,  to  establish  low  limits 
or  minimums  of  material  in  stock.  In  such  case  the 
storekeeper  will  ascertain  from  the  tally  cards  and 
from  the  office  ledger  cards,  if  he  has  ready  access 
to  them,  the  rate  of  consumption  during  the  time 
which  has  elapsed  between  the  ordering  of  the  mate- 
rial and  its  receipt,  and  any  special  requirements  in 
view  of  needs  for  any  specifications  received  for 


38  FACTORY   COST  KEEPING 

jobs  in  process.  With  this  as  a  basis  he  uses  his 
own  judgment  and  discretion  in  the  ordering  of  a 
new  supply  of  material,  which  he  estimates  will  last 
a  certain  length  of  time,  as  shown  by  the  record  of 
the  preceding  period  of  months.  It  is  rather  hard 
to  generalize,  because  in  some  systems  the  store- 
keeper will  receive,  as  soon  as  an  order  is  placed  in 
the  works,  a  detailed  requisition  for  the  material 
that  is  required  for  that  order,  and  he  can  then 
readily  ascertain  if  the  material  required  as  per  the 
specifications  in  hand  will  drain  his  present  stock 
below  the  minimum  limit  after  this  material  has  been 
taken  out  and  is  used  for  the  production  of  the 
finished  product. 

"Some  systems  will  keep  on  the  ledger  card  a 
record  of  what  material  the  storekeeper  has  ordered 
and  when  he  has  ordered  it,  so  that  on  consulting  the 
ledger  card  there  is  information  concerning  not  only 
the  present  stock  on  hand,  but  also  the  date  and 
quantity  of  the  order  that  has  been  previously  placed 
for  the  replenishment  of  that  stock." 

Inventories 

Closely  connected  with  the  operation  of  the  store- 
room is  the  important  matter  of  the  inventory.  The 
agreement  of  the  actual  inventory — determined  by 
a  physical  inspection,  count,  weight  or  measure  of 


ACCOUNTING  FOR  STORES  39 

the  materials  on  hand — with  the  book  inventory, 
determines  whether  or  not  there  have  been  any  leaks 
in  stores,  due  to  theft  or  other  loss,  or  to  the  failure 
to  make  proper  record  of  materials  received  or 
issued. 

The  accounts  carried  in  the  stores  ledger  aim  to 
show  by  their  balances  the  quantity  and  value  of  all 
material  on  hand  at  any  given  date.  The  trial  bal- 
ance of  this  ledger  is  known  as  a  book  inventory, 
and  sets  forth  the  quantities  and  value  of  all  material 
on  hand. 

The  advantages  of  a  continuous  book  inventory 
over  an  actual  one  taken  at  stated  times  are  more 
apparent  in  those  cases  in  which  the  keeping  of  the 
stores  or  material  records  is  an  integral  part  of  the 
accounting  system.  In  such  cases  the  expense  con- 
nected with  the  preparation  of  a  book  inventory  is 
obviously  less  than  that  connected  with  the  taking  of 
an  actual  one.  The  taking  of  an  actual  inventory  is 
attended  with  many  troubles,  first  in  getting  a  record 
of  the  materials  and  supplies  on  hand,  and  after- 
ward in  looking  up  prices  and  making  the  necessary 
adjustments. 

On  the  other  hand  an  actual  inventory  is  less  liable 
to  clerical  error;  also  some  material  is  not  covered 
in  a  book  inventory.  For  instance,  it  is  not  cus- 
tomary to  carry  materials  of  great  bulk,  such  as 


40  FACTORY  COST  KEEPING 

coal,  stone,  etc.,  in  a  book  inventory.  Also  an  actual 
inventory  will  cover  many  miscellaneous  supplies, 
parts  of  machinery,  etc.,  which  are  not  ordinarily 
found  in  a  book  record. 

The  liability  to  clerical  error  which  exists  in  a 
book  inventory  should  be  minimized  as  far  as  pos- 
sible by  comparison  of  the  book  inventory  with  an 
actual  inventory  at  frequent  periods  during  the 
year.  The  best  time  for  such  verification  of  the 
stores  ledger  accounts  is  when  the  minimum  limit  of 
the  stock  which  must  be  kept  on  hand  is  approached. 
Not  only  is  the  taking  of  the  inventory  lighter  at 
this  time,  but  an  actual  inventory  serves  to  determine 
accurately  whether  or  not  a  new  order  for  more 
material  shall  be  placed. 

Reconciling  Inventories 

Very  often  the  actual  inventory  will  not  agree 
with  the  book  record.  In  many  cases  the  reason 
for  this  can  be  traced  to  the  breaking  up  of  bulk 
packages  in  order  to  issue  to  the  producing  de- 
partments the  exact  amounts  called  for  by  their 
requisitions.  For  instance,  in  the  manufacture  of 
paper  large  quantities  of  sulphur  are  used.  The 
amount  shown  by  the  stores  requisitions  to  have 
been  delivered  to  the  manufacturing  departments 
is  usually  much  less  than  the  quantity  actually  de- 


ACCOUNTING  FOR  STORES  41 

livered,  largely  because  of  the  loss  in  breaking  up 
bulk  shipments.  Part  of  such  differences  is  usually 
due  to  evaporation,  deterioration,  loss  of  weight 
or  damage  in  handling,  etc.  Again,  in  the  case  of 
a  keg  of  nails,  the  stores  requisition  will  show 
that  140  pounds  of  nails  have  been  used,  whereas 
150  pounds  have  actually  been  withdrawn  from 
the  stock.  The  difference  is  due  to  the  small 
overweight  or  surplus  which  is  almost  inevitably 
added  to  each  pound  weighed  out. 

In  view  of  these  differences  a  book  adjustment 
of  some  kind  becomes  necessary.  In  those  cases 
where  the  difference  is  small  the  best  method  is 
to  make  the  necessary  adjustment  on  the  tally 
card,  by  correcting  the  quantity  to  correspond 
with  actual  conditions.  At  the  same  time  the 
quantity  item  in  the  stores  ledger  account  is  simi- 
larly corrected  as  to  quantity,  but  no  change  is 
made  as  to  the  book  value  of  the  stock  on  hand. 
Any  quantities  withdrawn  after  this  adjustment 
has  been  made  will  therefore  be  charged  to  the 
production  order  at  a  slightly  higher  unit  cost 
than  formerly  prevailed.  Thus,  for  example,  an 
account  with  a  certain  type  of  bolts,  the  purchase 
price  of  which  is  I  cent  apiece,  shows,  before  the 
correction  is  made,  100,000  bolts  with  a  book  value 
of  $1,000.  The  actual  inventory,  however,  shows 


42  FACTORY   COST  KEEPING 

that  there  are  on  hand  only  99,600  bolts.  The 
quantity  on  hand  is  corrected,  therefore,  to  read 
99,600,  but  the  book  value  remains  as  formerly, 
at  $1,000.  If  1,000  bolts  are  now  withdrawn  by 
requisition,  they  will  be  billed,  not  at  $10,  as 
formerly,  but  at  $10.04.  It  will  be  noticed  that 
the  correction  of  the  inventory  by  this  method 
involves  no  changes  on  the  general  books. 

In  the  case  of  a  large  difference,  however,  it  is 
not  advisable  to  use  the  above  method.  Any  dif- 
ference involving  large  quantities  should  be 
looked  up  immediately  and  investigated,  for  there 
is  a  possibility  that  instead  of  having  been  due  to 
a  clerical  error  or  a  difference  occurring  through 
an  honest  mistake,  it  may  have  been  caused  by 
stealing  on  the  part  of  dishonest  employees. 

Pending  an  investigation,  the  discrepancy — if 
it  represents  a  loss — should  be  taken  out  of  the 
stores  ledger  through  a  commercial  journal  entry, 
crediting  stores  for  the  amount  involved,  in  order 
to  adjust  the  stores  account,  and  debiting  an  ac- 
count called  "Inventory  Adjustment."  An  entry 
is  made  at  the  same  time  in  the  stores  ledger  to 
the  credit  of  the  stores  account  involved.  The 
balance  of  the  Inventory  Adjustment  account  in 
the  general  ledger  will  show  at  any  time  the 
amount  of  money  paid  for  materials,  for  which 


ACCOUNTING  FOR  STORES  43 

there  is  nothing  to  show.  At  the  end  of  the  fiscal 
year  this  balance  is  closed  out  to  profit  and  loss 
as  an  item  of  general  expense.  It  has  no  place  as 
a  cost  of  production.  If  it  were  to  be  considered 
as  a  cost  of  production,  then  there  would  be  no 
use  whatever  in  attempting  to  ascertain  costs  by 
a  record  of  material  consumed.  It  would  be  as  if 
we  took  stock,  and  charged  the  difference  between 
purchases  plus  previous  inventory  and  the  results 
disclosed  by  subsequent  stock  taking  as  the  cost 
of  materials  consumed,  with  no  assurance  that 
such  really  had  been  the  case. 


CHAPTER   III 
ACCOUNTING   FOR    LABOR 

Under  the  discussion  of  stores,  it  was  shown 
how  any  lack  of  adjustment  between  the  book 
inventory  and  the  actual  inventory  was  corrected 
by  means  of  the  general  ledger  "Inventory  Ad- 
justment Account."  A  similar  comparison  must 
be  made  to  show  the  difference  between  the  labor 
paid  for  and  that  actually  expended  on  goods  in 
process. 

Materials  and  Labor  Compared 

One  great  difference  between  the  handling  of 
materials  and  the  handling  of  labor  must  be  borne 
in  mind  in  order  to  understand  thoroughly  the 
difference  in  the  methods  employed  to  record  their 
costs.  All  materials,  from  a  bookkeeping  stand- 
point, are  paid  for  as  soon  as  they  are  received. 
That  is  to  say,  when  materials  come  into  a  plant, 
the  entry  recording  their  receipt  is  a  debit  to 
44 


ACCOUNTING  FOR  LABOR  45 

"Stores"  and  a  credit  to  cash — or  to  the  party 
from  whom  they  have  been  bought.  This  credit 
represents  a  giving  of  value,  for  it  is  a  liability  of 
the  purchaser  for  the  amount  of  the  purchase. 
As  regards  labor,  however,  the  rule  is  different. 
Labor  is  never  paid  for  until  it  has  been  consumed 
by  the  employer,  nor  is  there  a  liability  shown  on 
the  books  for  wages  due  until  some  work  has  been 
performed  by  the  wage  earner.  Consequently 
there  is  no  inventory  of  labor,  such  as  we  have  in 
the  case  of  stores.  The  cost  of  all  labor,  as  ren- 
dered, is  charged  to  the  cost  of  goods  in  process 
of  manufacture.  Therefore  there  is  no  stock  rec- 
ord of  labor  on  hand. 

Methods  of  Recording  Time 

The  chief  problem  in  the  accounting  for  labor  is 
the  formulation  of  a  system  which  will  give  an 
accurate  record  of  the  labor  time  consumed  in 
production. 

Until  recently,  in  many  factories,  the  watchman 
or  gatekeeper,  stationed  at  the  entrance  to  the 
factory,  kept  a  record  of  the  employees  as  they 
arrived  in  the  morning  and  departed  at  night, 
each  workman  being  known  to  him  personally. 
Under  this  system,  if  an  employee  were  late,  even 
if  only  as  much  as  a  minute,  he  was  docked  a  half 


46  FACTORY   COST   KEEPING 

hour's  time.  Any  labor  cost  less  than  half  an 
hour  did  not  figure  in  production  costs.  The 
gatekeeper's  record  was  amply  sufficient  for  pay- 
roll purposes,  as  well  as  for  the  determination  of 
costs  of  production  in  the  aggregate. 

Under  another  system  of  time  keeping  each 
laborer  was  assigned  a  number.  A  series  of  brass 
checks,  numbered  to  correspond  to  the  work- 
men's numbers,  were  hung  on  a  board  at  the  gate- 
keeper's lodge  or  outside  the  watchman's  office, 
and  as  the  men  entered  in  the  morning  each  one 
would  take  his  own  check  off  its  hook  and  drop  it 
into  a  box  kept  for  that  purpose  at  the  watch- 
man's office.  The  board  on  which  the  checks  were 
hung,  being  arranged  on  a  pivot,  was  turned 
around  when  the  beginning  whistle  blew  so  that 
the  side  containing  the  checks  faced  into  the 
office.  Any  man  who  was  late  must  then  pass 
through  the  watchman's  office  before  he  would 
receive  credit  for  having  been  at  the  plant.  This 
scheme  worked  well  as  long  as  the  watchman  was 
careful  not  to  let  any  man  drop  the  check  of  a 
comrade  at  the  time  that  he  dropped  his  own. 

The  weakness  of  both  these  systems  lay  in  the 
fact  that  there  was  no  check  whatever  on  the  time 
the  men  actually  spent  at  work.  A  man  might 
register  for  an  absent  comrade,  or  he  might  record 


ACCOUNTING  FOR  LABOR  47 

his  own  arrival  and  then  take  his  departure  from 
the  plant  by  climbing  over  the  back  fence,  return- 
ing by  the  same  route  at  noon  in  order  to  pass  out 
through  the  gate.  By  this  means  he  would  re- 
ceive credit  for  having  worked  a  full  half  day, 
when  as  a  matter  of  fact  he  had  rendered  no  ser- 
vice whatever  to  his  employer. 

In  order  to  prevent  such  practices,  which  even 
today  are  not  infrequent  in  plants  which  do  not 
have  a  thorough  system  for  checking  labor  time, 
it  was  found  necessary  to  employ  departmental 
timekeepers,  whose  duty  it  was  to  make  a  tour  of 
the  plant  to  ascertain  whether  each  man  was  at 
his  appointed  task. 

It  was  soon  recognized  that  a  knowledge  of  the 
exact  time  spent  by  each  man  on  a  piece  of  work 
handled  by  him  was  not  only  desirable  but  neces- 
sary, in  order  to  determine  accurately  the  labor 
cost  of  each  unit  of  product.  This  was  accom- 
plished by  the  timekeeper  getting  from  each 
workman  a  statement  of  the  time  spent  on  differ- 
ent pieces  of  work;  and  the  results  of  these  rough 
guesses  were  used  to  compile  the  labor  cost  of 
work  in  process. 

The  employment  of  departmental  timekeepers 
was  an  added  expense  to  the  operation  of  the 
plant.  It  was  not  long,  therefore,  before  this 


48  FACTORY   COST  KEEPING 

work  was  shouldered  onto  the  foremen  of  the  va- 
rious divisions  of  the  factory.  This  was,  in  many 
cases,  putting  too  much  work  on  the  foremen, 
and  seriously  impaired  their  efficiency  as  superin- 
tendents of  men  and  as  overseers  of  the  work. 
The  next  development  was  to  have  the  men  them- 
selves keep  their  record  of  time  spent  on  each 
piece  of  work.  The  results  were  set  forth  on  slips 
which  were  turned  into  the  office,  where  the  time 
as  shown  was  posted  to  the  accounts  of  the  va- 
rious orders  to  which  it  belonged.  This,  as  can 
well  be  seen,  was  a  loose  system,  for  the  reason 
that  the  workman's  sense  of  time  was  frequently 
not  well  developed,  and  there  was  neither  incen- 
tive nor  necessity  for  accuracy.  Since  there  was 
no  definite  check  on  the  workman's  movements, 
his  record  would  often  show  that  he  "knocked 
off"  at  12:30  P.  M.,  when  as  a  matter  of  fact  he 
quit  work  at  12  120  P.  M.,  and  loitered  around  the 
toilet  room  or  engaged  in  conversation  with  other 
workmen  for  the  extra  ten  minutes  which  had 
been  charged  by  him  to  the  work  just  finished. 

These  difficulties  have  been  largely  overcome 
by  the  use  of  mechanical  devices  for  the  recording 
of  time.  One  record  is  made  of  the  total  time 
on  duty,  which  serves  as  the  basis  for  the  pay-roll, 
and  a  second  record  is  kept  of  the  time  actually 


ACCOUNTING  FOR  LABOR  49 

expended  on  work  performed,  which  serves  as  the 
basis  of  the  charges  to  manufacturing  cost. 

The  time  on  duty  is  obtained  from  a  time  card 
record,  while  the  time  on  work  in  process  appears 
on  work  tickets  or  job  cards.  The  total  time  on 
duty  should  agree  with,  the  total  time  expended 
on  goods  in  process,  plus  any  lost  time. 

Expressed  diagrammatically  the  relation  of  the 
time  cards  to  the  work  tickets  is  shown  on  page  50. 

Piece  Work 

While  the  modern  system  of  recording  labor 
costs  is  a  great  advance,  "soldiering"*  is  still  en- 
tirely possible,  and  cannot  be  prevented  unless 
there  is  some  limit  placed  on  the  amount  of  time 
within  which  a  certain  amount  of  work  must  be 
performed.  It  is  obvious  that  soldiering  under  a 
time  system  leads  to  direct  loss  to  the  employer, 
because  the  labor  cost  to  do  a  given  piece  of  work 
is  higher  than  it  should  be.  To  prevent  this  loss, 
the  piece  work  system  of  payment  was  devised. 
This  eliminates  the  undue  labor  costs,  but  it 
does  not  completely  solve  the  problem,  for  loss  is 
still  incurred  by  the  employer  if  his  employee 
"soldiers."  This  is  due  to  the  fact  that  a  large 


*  Soldiering  is  a  term  used  to  express  the  loafing  of  a  workman  over 
his  work. 


50 


FACTORY    COST    KEEPING 


TIME  CARDS 

WORK  TICKETS 

Tune  o 

o  duty 

Time  on  food*  in  proceM 

1 

TIME  BOOK 

Summary  time  card*  by  men 

WAGES  ALLOCATION 
SHEET 

Labor  co«u  by  production  orden 

WAGES  BOOK 

For  P»y-Roll 

CASH 

BOOK 

• 

LEDGER 

Diagram  7.     Relation  between   Time  Cards,  and 
Work  Tickets 


ACCOUNTING  FOR  LABOR  51 

part  of  the  cost  of  manufacture  is  made  up  of 
other  costs,  as  for  instance  power  costs  and  interest 
on  the  investment  where  machinery  is  operated 
by  the  workman.  If  the  employee  dallies,  the 
machine  time  required  to  complete  a  given  job  is 
considerably  lengthened,  thereby  increasing  the 
proportionate  charge  for  the  use  of  the  machine 
which  must  be  made  against  the  particular  job  in 
question.  It  is  easily  seen  that  the  greater  the 
volume  of  work  obtained  from  a  machine,  the 
smaller  will  be  the  proportion  of  interest,  rent  and 
maintenance  which  will  have  to  be  charged  to  each 

unit  of  output. 

CHARLES  E.  LC 

Towne-Halsey  Plan  of  Wage  Pay mentSPO KANE,  WAS 

There  are  several  plans  for  determining  the 
proper  time  limits  for  regular  work,  among  which 
may  be  mentioned  the  Towne-Halsey  plan.  Un- 
der this  plan  a  record  is  obtained  of  the  quickest 
time  in  which  a  job  has  been  done,  and  this  is 
fixed  as  a  standard  for  similar  work. 

If  the  workman  succeeds  in  accomplishing  his 
assigned  task  within  a  shorter  time  than  the 
standard  limit,  he  is  paid  the  same  hourly  rate  as 
before,  and  in  addition  receives  a  premium  con- 
sisting of  a  percentage  of  the  difference  between 
the  wages  actually  earned  and  the  amount  which 


52  FACTORY   COST  KEEPING 

would  have  been  paid  if  he  had  taken  the  full 
time  allowed.  Let  us  suppose,  for  instance,  that  a 
workman  receives  20  cents  an  hour;  that  he  is  as- 
signed to  a  piece  of  work  whose  standard  limit  is 
two  hours;  that  by  working  fast  the  job  is  finished 
in  one  hour,  and  finally  that  the  premium  is  50 
per  cent.  Under  these  conditions  he  would  re- 
ceive for  his  hour's  work  the  regular  rate  of  20 
cents  plus  50  per  cent  of  the  one  hour  earnings 
under  the  standard  limit,  or  a  total  of  30  cents 
for  his  work  of  one  hour.  The  weakness  of  this 
system  is  that  after  it  has  been  installed  and  the 
workmen  become  familiar  with  the  plan,  the  in- 
ducement to  soldier  on  any  new  work  which  may 
be  undertaken  is  great.  By  loafing  over  the  new 
task,  a  longer  time  limit  is  secured  as  a  standard, 
and  the  workman  is  thereafter  enabled  to  earn 
higher  wages  with  moderate  effort. 

Taylor  Premium  Plan  of  Wage  Payment 

A  better  system  for  determining  time  limits  is 
that  devised  by  Frederick  W.  Taylor,  of  Philadel- 
phia. His  system  aims  to  have  the  time  standard 
determined  with  scientific  accuracy,  and  for  this 
purpose  he  divides  any  given  piece  of  work  into 
its  elements.  The  time  which  is  consumed  in 
performing  each  operation  is  measured  by  a  stop 


ACCOUNTING  FOR  LABOR  53 

watch.  Suppose  we  take,  for  example,  a  man 
loading  brick  on  a  wagon.  Each  component  part 
of  the  operation  is  first  timed.  The  time  con- 
sumed in  stooping  over  to  pick  up  the  bricks  or 
to  arrange  them  in  a  pile  for  carrying,  the  length 
of  time  spent  in  piling  them,  or  even  the  length 
of  time  it  takes  to  lay  one  brick  in  a  pile,  may  be 
taken  as  a  unit  of  time.  Then  a  compilation  is 
made  of  the  time  consumed  in  lifting  the  bricks 
after  they  have  been  piled,  the  time  per  foot  of 
carrying  them  on  a  level  piece  of  ground,  or  the 
time  it  takes  to  make  one  step  on  level  ground. 
Also  the  time  it  takes  to  throw  down  the  bricks, 
or  to  arrange  them  in  the  wagon,  if  this  is  done,  is 
ascertained.  Finally  the  time  of  returning  to  the 
place  of  starting  for  another  pile  is  determined. 
From  a  total  of  the  time  of  the  various  units  can 
be  obtained  an  accurate  time  limit  for  the  opera- 
tion as  a  whole. 

If  the  time  so  ascertained  be  taken  as  the  basis 
for  loading  brick  on  a  wagon,  then  for  work  of 
this  character  there  is  a  definite  amount  of  time 
within  which  it  is  possible  to  load  a  certain  num- 
ber of  bricks.  To  the  actual  time  thus  determined 
should  be  added  about  TO  per  cent  to  allow  for 
unavoidable  delays,  and  the  result  will  give  the 
time  to  be  insisted  on  in  all  cases. 


54  FACTORY   COST  KEEPING 

The  advantage  which  Mr.  Taylor's  system  has 
over  the  Towne-Halsey  plan  is  that  if  any  new 
work  is  assigned  to  the  men,  a  knowledge  of  the 
unit  cost  of  such  work  can  be  had  in  advance  and 
the  standard  time  can  be  accurately  calculated 
therefrom.  To  refer  again  to  our  illustration  of 
the  man  engaged  in  loading  brick  on  a  wagon. 
If  he  had  to  walk  50  feet  farther,  on  a  new  job,  it 
is  possible,  by  knowing  the  length  of  time  that  it 
takes  to  walk  a  given  number  of  feet,  to  readily 
calculate  the  additional  time  which  should  be  al- 
lowed to  do  the  work  required. 

The  inducements  to  work  under  Mr.  Taylor's 
system  can  be  summarized  under  two  headings: 
first,  the  increased  amount  which  a  workman  can 
earn,  if  he  is  thoroughly  efficient,  by  cutting  down 
the  time  assigned  and  thus  earning  a  premium; 
and,  second,  dismissal  of  the  workman  who, 
within  a  given  time,  cannot  earn  the  minimum 
rate.  In  one  large  manufacturing  plant  in  Phila- 
delphia it  takes  the  workman  about  two  weeks 
to  secure  the  necessary  proficiency  to  earn  the 
minimum  rate,  and  if  the  rate  is  not  reached  in 
that  time  the  man  is  discharged.  This  plant,  after 
installing  the  Taylor  system  of  time  limits,  in- 
creased its  output  over  100  per  cent  without  any 
increase  in  labor  costs. 


ACCOUNTING  FOR  LABOR  55 

Time  Recording  Devices 

Having  based  our  labor  system  upon  a  series  of 
time  limits,  let  us  now  see  how  it  will  operate  in 
practice.  One  of  the  best  mechanical  devices  for 
recording-  time  is  a  card  time  clock.  Not  only 
does  it  give  a  complete  record  but  its  capacity  is 
not  limited,  as  are  the  clocks  arranged  for  a  speci- 
fied number  of  employees.  The  best  location  for 
such  a  clock  is  in  the  workroom.  In  large  con- 
cerns one  clock,  with  complete  equipment,  ought 
to  be  provided  for  each  department.  This  pre- 
vents any  loafing  on  the  way  from  the  factory  en- 
trance to  the  department  in  which  the  employees 
work. 

The  equipment  of  a  card  time  clock  for  pur- 
poses of  cost  keeping  should  include  four  card 
racks,  two  located  on  either  side  of  the  card  clock 
itself.  To  the  right  of  the  card  clock  should  be 
the  "OUT"  racks,  while  the  "IN"  racks  are  placed 
to  the  left.  One  of  the  "OUT"  racks  is  arranged 
for  the  pay-roll  or  time  cards  of  the  men  when 
not  at  work,  while  the  other  contains  the  work 
tickets  for  jobs  ahead.  One  of  the  "IN"  racks 
is  used  to  contain  the  pay-roll  or  time  cards  of 
the  men  actually  at  work,  while  the  other  is  used  for 
the  work  tickets  representing  jobs  in  operation. 
To  the  left  of  the  clock  and  below  the  "IN"  racks 


56  FACTORY   COST   KEEPING 

should  be  placed  a  "Job  Ticket"  box,  which  is 
provided  with  a  glass  front  and  a  slotted  cover. 
This  box  is  divided  into  two  parts,  one  for  sus- 
pended jobs  and  the  other  for  finished  jobs. 

As  a  practical  illustration  of  the  operation  of 
a  card  time  clock,  we  will  assume  that  such  a  de- 
vice, together  with  its  equipment  as  described 
above,  has  been  installed  in  a  department  which 
employs  20  men.  On  the  day  previous,  the  fore- 
man has  filled  out  one  or  more  job  tickets  for 
each  employee  in  the  department.  These  tickets 
show  the  workman's  name  and  number,  and 
specify  what  particular  work  is  to  be  performed 
by  him  on  the  job,  which  is  indicated  on  the  ticket 
by  its  production  number.  These  job  tickets  are 
placed,  one  for  each  man,  in  the  "OUT"  rack  in 
the  portion  placarded  "Pay-Roll  Cards."  A  simi- 
lar ticket  for  the  next  job  on  which  each  man  is 
to  work  is  placed  in  that  portion  placarded  "Jobs 
Ahead." 

Along  with  the  job  tickets  which  have  been 
placed  in  the  pay-roll  card  portion  of  the  "OUT" 
rack,  each  workman  finds  upon  his  arrival  a  weekly 
time  card.  When  workman  Jones,  for  instance, 
arrives  in  the  morning,  he  takes  his  time  card  and 
the  job  ticket,  which  he  finds  in  the  pocket  bear- 
ing his  number  in  the  "OUT"  rack,  as  above  set 


ACCOUNTING  FOR  LABOR  57 

forth,  and  records  his  time  of  arrival  on  both 
tickets  by  placing  them  in  the  clock  and  "ringing 
in."  The  time  card  is  then  placed  by  him  in  that 
portion  of  the  "IN"  rack  devoted  to  the  pay-roll 
cards,  while  his  job  ticket  is  placed  in  the  "Jobs 
in  Operation"  rack,  as  soon  as  he  has  ascertained 
just  what  is  required  of  him  in  connection  with 
that  particular  job. 

Upon  the  completion  of  the  operation  specified 
on  his  job  ticket,  Jones  goes  to  the  recorder  and 
"rings  out"  on  the  job  ticket  in  question.  He 
then  places  the  completed  job  ticket  in  the  "Job 
Ticket"  box,  in  the  portion  headed  "Finished 
Jobs."  He  then  takes  from  the  "Jobs  Ahead" 
rack  his  next  job  ticket,  rings  it  in,  and  carries 
on  the  operation  as  called  for  until  he  either  com- 
pletes it  or  goes  to  lunch.  In  the  former  case  he 
proceeds  as  already  outlined,  while  in  the  latter 
case  he  will  ring  out  on  both  the  job  ticket  and 
the  time  card,  and  place  them  in  the  "OUT"  rack 
until  his  return. 

The  foreman  keeps  in  touch  with  the  progress 
of  the  work  in  the  department  by  noting  the  cards 
which  have  been  placed  in  the  "Job  Ticket"  box. 
Such  tickets  are  removed  by  the  foreman  and 
placed  in  his  office  in  a  special  cabinet,  in  which 
all  job  tickets  are  arranged  according  to  the  work- 


58  FACTORY   COST  KEEPING 

men's  numbers.  An  examination  of  the  tickets 
in  the  ''Job  Ticket"  box  indicates  to  the  foreman 
the  workmen  for  whom  new  jobs  should  be  sup- 
plied. The  "Jobs  Ahead"  rack  is  accordingly  re- 
plenished by  the  foreman  from  the  supply  of  job 
tickets  kept  by  him  in  his  office. 

Should  it  become  necessary,  for  any  reason,  to 
suspend  operations  on  a  job,  the  workman  will 
ring  out  on  his  job  ticket  and  place  it  in  the  "Job 
Ticket"  box  through  the  slot  designated  "Sus- 
pended Jobs."  Upon  its  removal  by  the  foreman, 
he  can  again  place  it  in  the  "Jobs  Ahead"  rack 
for  the  workman  in  question,  or  can  transfer  the 
job  to  another  employee,  at  his  discretion.  In 
the  latter  case  he  will  fill  out  another  ticket,  bear- 
ing the  number  of  the  employee  who  is  to  perform 
the  work  indicated  on  the  job  ticket. 

As  above  mentioned,  the  "Finished  Jobs" 
cards,  as  collected  by  the  foreman,  are  filed  by  him 
according  to  the  workmen's  numbers.  At  the  end 
of  each  day  representatives  from  the  cost  depart- 
ment compare  the  total  time  of  each  man  as  re- 
corded on  the  job  cards  with  his  time  as  shown 
by  the  time  card.  These,  of  course,  should  agree. 
In  case  a  difference  exists,  the  cause  can  be  easily 
traced  either  to  neglect  on  the  part  of  the  fore- 
man to  provide  work  in  advance,  or  to  a  failure 


ACCOUNTING  FOR  LABOR  59 

to  credit  the  workman  for  work  performed.  In 
either  case  it  is  not  just  to  the  work  in  process  to 
charge  such  lost  time  as  an  item  of  production 
cost. 

Recording  Labor  Costs 

The  method  of  recording  labor  costs  on  the 
books,  so  that  any  discrepancy  between  the  work 
paid  for  and  the  cost  of  work  actually  performed 
can  be  easily  shown,  is  accomplished  as  follows: 

After  the  comparison  of  the  job  cards  with  the 
time  cards,  the  former  are  taken  to  the  cost  de- 
partment, where  they  are  sorted  according  to  the 
production  orders  worked  upon.  The  daily  to- 
tals, after  being  summarized  on  a  summary  card, 
or  sheet,  are  posted  to  the  debit  side  of  the  va- 
rious cost  accounts  in  the  same  way  that  mate- 
rials consumed  are  posted  from  the  stores  requisi- 
tions. A  statement  is  then  prepared  showing  the 
total  amount  of  labor  costs  for  the  day  in  all  de- 
partments. At  regular  intervals — usually  monthly 
— this  total  is  entered  in  the  journal  and  then 
posted  to  the  ledger  as  a  debit  to  Manufacturing 
account,  which,  as  we  have  seen,  is  the  controlling 
account  of  the  cost  ledger,  showing  the  total  cost 
of  goods  in  process  at  any  given  time.  The  off- 
setting credit  is  made  to  Labor,  or  Pay-roll  ac- 


60  FACTORY   COST   KEEPING 

count.     This  latter  account  shows  the  amount 
owing  to  laborers  for  work  performed. 

Paying  the  Workmen 

At  the  end  of  each  week  the  weekly  time  cards 
are  collected,  and  the  amount  of  pay  for  that  pe- 
riod in  the  case  of  each  man  is  calculated  and 
extended.  From  these  cards  the  pay-roll  is  made 
up;  and  the  cards  are  returned  to  the  racks  on 
pay  day  so  that  the  men  may  get  them  for  pay- 
roll purposes,  and  may  at  the  same  time  have  op- 
portunity to  see  that  the  extensions  have  been 
properly  made.  Each  workman  signs  his  name  on 
the  back  of  his  card  and  presents  it  at  the  pay- 
master's window,  where  he  receives  his  pay. 

In  the  meantime  the  total  as  shown  by  the 
pay-roll,  which  has  been  certified  to  by  the  super- 
intendent, forms  the  basis  for  a  cash  book  entry 
crediting  cash  for  the  check  drawn  on  the  bank 
for  pay-roll  purposes,  and  debiting,  in  the  ledger, 
Labor,  or  Pay-roll  account,  which  previously  has 
been  credited  with  the  total  of  the  work  tickets 
showing  the  amount  of  labor  charged  to  the 
goods  in  process. 

The  method  of  paying  the  men  just  described 
is  usually  regarded  as  the  best  in  use,  embodying 
as  it  does  all  the  approved  checks  on  the  amount 


ACCOUNTING  FOR  LABOR  61 

paid,  including  receipts  from  the  men  for  the 
moneys  received.  As  stated,  the  workman  signs 
the  time  card  for  the  amount  of  his  last  week's 
work  which  is  shown  thereon,  and  presents  it  at 
the  window  to  be  cashed,  in  the  same  way  that 
a  check  is  presented  for  cashing  at  a  bank.  He 
thus  gives  his  receipt  for  his  money,  and  at  the 
same  time  can  see  whether  the  money  received  is 
the  amount  he  has  receipted  for.  Under  such 
circumstances  he  can  have  no  subsequent  claim 
for  alleged  shortages,  as  sometimes  occurs  under 
the  envelope  system.  The  envelope  system,  even 
at  its  best,  must  be  hedged  about  with  so  many 
safeguards  that  it  is  liable  to  produce  increased 
expense. 

General  Ledger  Labor  Account 

It  can  be  readily  seen  that  after  the  pay-roll  has 
been  made  up  and  the  entries  posted  from  the  com- 
mercial side — that  is  to  say,  the  cash  book — and  the 
factory  side — the  manufacturing  journal — into  the 
"Labor"  account  in  the  general  ledger,  both  sides  of 
this  account  should  be  in  balance.  If,  however,  any 
difference  should  exist  as  between  the  amount  of 
labor  paid  for  and  the  amount  of  labor  charged  to 
goods  in  process,  such  balance  will  show  up  directly 
in  the  general  ledger  "Labor"  account.  Many 


62  FACTORY   COST  KEEPING 

manufacturers  do  not  like  this  account  to  show  this 
balance  continuously,  so  a  transfer  is  made  to  a 
"Labor  Adjustment  Account"  which  shows  by  its 
balance  the  loss  in  labor. 

This  is  exactly  the  same  as  in  the  handling  of  any 
difference  in  materials,  as  before  shown.  An  inspec- 
tion, therefore,  of  the  balances  of  the  Inventory 
Adjustment  account  and  the  Labor  Adjustment 
account  will  show  at  a  glance  the  amount  of  any 
loss  in  stores  and  in  direct  labor  respectively. 


CHAPTER  IV 
ACCOUNTING  FOR  INDIRECT  EXPENSES 

We  have  now  to  consider  the  third  factor  entering 
into  the  production  cost  of  a  manufactured  article. 
This  factor  is  variously  designated  as  indirect  ex- 
penses, overhead  charges,  expense  burden,  etc.,  and 
includes  all  costs  entering  into  the  production  of  a 
finished  article,  other  than  the  direct  labor  and  mate- 
rial expended  upon  it.  Examples  of  indirect  ex- 
penses are:  insurance,  rent,  taxes,  power,  interest, 
depreciation,  etc. 

Importance  of  Indirect  Expenses 

In  the  early  days  of  factory  accounting  manu- 
facturers did  not  concern  themselves  with  anything 
but  prime  costs,  or,  in  other  words,  direct  material 
and  labor  cost.  All  other  production  expenses  were 
provided  for  in  the  amount  of  profit  which  they 
received  over  and  above  this  cost.  It  soon  became 
necessary,  however,  to  do  more  than  ascertain  prime 
cost,  for  the  general  improvement  in  manufacturing, 
together  with  the  enormous  increase  in  the  number 
and  kinds  of  machines  taking  the  place  of  hand 

63 


64  FACTORY   COST  KEEPING 

labor,  steadily  increased  the  amount  of  factory 
indirect  expenses.  Again,  it  became  evident  as  com- 
petition increased  that  the  results  which  were  arrived 
at  by  taking-  only  material  and  labor  costs,  without 
considering  the  other  expenses,  did  not  furnish  ade- 
quate information  for  the  fixing  of  prices.  The 
manufacturer  who  sold  at,  or  slightly  above,  cost 
figures  in  which  indirect  expenses  were  not  consid- 
ered was  in  reality  losing  money.  Therefore,  in 
order  to  arrive  at  the  true  cost  of  production,  man- 
ufacturers began  to  distribute  the  indirect  cost  over 
prime  cost. 

i 
Methods  of  Distributing  the  Expense  Burden 

There  are  many  plans  by  which  production  can  be 
more  or  less  equitably  charged  with  the  overhead 
expense,  and  in  each  plant  the  manufacturer  has  to 
decide  which  plan  is  best  adapted  to  the  peculiar 
needs  of  his  business.  Five  methods  of  distributing 
expense,  with  minor  modifications,  are  commonly 
employed.  Under  these  expense  is  distributed  as 
follows : 

1 i )  As  a  certain  percentage  of  direct  labor  cost. 

(2)  As  a  certain  cost  per  direct  labor  hour. 

(3)  As  a  certain  percentage  of  material  cost. 

(4)  As  a  certain  percentage  of  prime  cost. 

(5)  On  the  basis  of  machine  rates. 


ACCOUNTING  FOR  INDIRECT  EXPENSES    65 

Each  of  these  methods  will  be  taken  up  in  turn 
and  its  operation  studied. 

(i)  DIRECT  LABOR  COST. — The  first  method  of 
distribution  requires  that  the  total  amount  of  the 
indirect  expenses  be  found  for  a  given  fiscal  period, 
say  one  year.  Next,  the  percentage  is  ascertained 
which  this  total  bears  to  the  total  pay-roll  of  the 
producing  laborers  for  the  same  period.  To  the 
prime  cost  of  goods,  i.  e.,  cost  of  materials  and 
labor,  there  is  added  this  ascertained  percentage  of 
the  labor  cost  to  produce  the  complete  cost  figures 
for  the  period.  The  cost  of  any  particular  article  is 
found  by  first  ascertaining  its  labor  and  material 
cost,  and  then  adding  to  this  a  corresponding  per- 
centage of  the  labor  cost  to  cover  overhead  expense. 

This  method  has  few  advantages,  and  many  dis- 
advantages. The  chief  advantage  is  found  in  the 
fact  that  almost  certainly  the  calculations  made  upon 
this  basis  will  absorb  the  whole  expense  in  a  given 
time.  Its  weaknesses  are,  however,  manifold.  In 
the  manufacture  of  many  articles  there  is  one  opera- 
tion dependent  upon  hand  labor,  and  many  other 
operations  performed  almost  entirely  by  machinery. 
If  the  indirect  expenses  are  distributed  by  a  per- 
centage of  the  labor  cost,  it  is  readily  seen  that  the 
process  dependent  upon  hand  labor  is  charged  far 


66  FACTORY   COST  KEEPING 

more  heavily  than  is  the  process  involving  ma- 
chinery. This  is  a  serious  error;  for  the  process 
requiring  machinery,  or  any  producing  agent  other 
than  direct  labor,  ought  to  bear  a  higher  proportion 
of  the  indirect  expenses  than  that  using  little  or  no 
machinery. 

But  the  error  extends  further.  It  exists  even 
where  hand  work  is  entirely  eliminated.  The  manu- 
facture of  rivets  will  furnish  a  good  illustration. 
Two  types  of  machinery  may  be  used  in  their  pro- 
duction. In  the  first  type  of  machine,  each  revolu- 
tion of  the  fly-wheel  produces  a  perfect  rivet.  The 
second  type — called  a  four-hammer  machine — re- 
quires four  revolutions  of  the  fly-wheel  to  produce 
the  same  rivet.  The  labor  cost  in  operating  the  two 
machines  is  substantially  the  same;  yet  it  stands  to 
reason  that  the  indirect  cost  on  the  second  machine 
is  higher  than  that  on  the  first  because  of  the  greater 
use  of  power  and  time. 

A  more  striking  illustration  of  the  insufficiency 
of  the  percentage-on-labor-cost  plan  can  be  seen  in 
those  cases  where  operations  of  a  different  character 
are  brought  into  contrast.  A  drill-press  operator, 
receiving  23  cents  an  hour,  completes  a  given  piece 
of  work  in  two  hours.  The  direct  labor  cost  is 
therefore  46  cents.  Now  if  the  percentage  for  the 
distribution  of  the  indirect  expenses  be  50  per  cent 


ACCOUNTING  FOR  INDIRECT  EXPENSES     67 

of  the  labor  cost,  indirect  expenses  will  be  23  cents. 
In  contrast  to  this,  take  an  operator  employed  in 
looking  after  a  group  of  five  automatic  gear-cutting 
machines.  The  wages  of  such  a  man  would  be  con- 
siderably less  than  those  of  the  drill-press  operator, 
say  12  cents  an  hour.  For  two  hours  of  work  our 
cost  of  labor  would  be  24  cents,  and  indirect  expenses 
would  be  12  cents,  whereas  the  actual  indirect  ex- 
pense is  much  greater  than  in  the  first  case  cited. 

(2)  DIRECT  LABOR  HOUR. — Under  the  second 
method  for  the  distribution  of  indirect  expense,  the 
total  producing  hours  of  labor  are  reduced  to  a  per 
man-hour  basis.  Assume,  for  example,  that  a  plant 
employs  160  workmen,  each  of  whom  averages 
2,700  hours  per  year;  the  total  time  of  the  entire 
working  force  will  be  432,000  man-hours.  If  we 
divide  this  time  into  the  total  indirect  expenses  for 
the  year  the  result  will  be  the  indirect  expense  per 
man-hour. 

To  the  prime  cost  of  any  piece  of  work  is  added 
the  per  man-hour  rate,  determined  as  above,  multi- 
plied by  the  number  of  producing  man-hours  spent 
upon  the  job.  The  result  is  the  total  manufacturing 
cost. 

This  method  is  better  than  the  percentage-on- 
labor-cost  plan,  because  the  greater  the  number  of 


68  FACTORY   COST  KEEPING 

hours  devoted  to  the  work,  the  higher  is  the  amoufit 
charged  for  the  indirect  expenses,  irrespective  of 
labor  cost.  It  frequently,  however,  does  not  furnish 
accurate  results. 

Referring  again  to  the  illustration  of  the  "press 
hand,"  if  a  23-cent  man  is  working  on  a  drill  press 
for  two  hours,  and  the  hourly  rate  for  the  distribu- 
tion of  indirect  expenses  is  30  cents,  then  the  cost 
of  labor  and  indirect  expense  for  the  two  hours  will 
be  $1.06.  On  the  other  hand,  the  man  in  charge  of 
the  five  automatic  gear-cutting  machines  earns  12 
cents  an  hour,  and  for  two  hours  the  labor  and  in- 
direct expense  cost  will  amount  to  84  cents,  or  con- 
siderably less  than  the  cost  of  the  product  on  the 
drill  press.  Such  ought  not  to  be  the  case,  however, 
as  the  indirect  expenses  in  the  latter  case  are  ob- 
viously greater  than  in  the  former,  owing  to  the 
greater  amount  of  machinery  used. 

(3)  MATERIAL  COST. — The  third  method  for  the 
distribution  of  indirect  expenses  provides  that  to  the 
cost  of  material  used  during  a  given  period  there 
shall  be  added  a  certain  percentage  of  this  cost 
which,  from  past  experience,  is  believed  to  be  suffi- 
cient to  cover  the  total  amount  of  the  indirect  ex- 
penses. This  method  is  the  one  usually  adopted 
where  the  amount  of  machine  work  on  each  unit  of 
production  is  substantially  the  same,  whether  such 


ACCOUNTING  FOR  INDIRECT  EXPENSES     69 

unit  be  pounds,  tons,  or  pieces.  In  all  industries, 
however,  where  there  is  a  difference  in  the  amount 
of  mechanical  work  required,  or  where  there  are 
different  grades  of  product,  this  method  will  not 
prove  satisfactory. 

The  manufacture  of  bolts  and  nuts  furnishes  us 
with  an  excellent  illustration  of  the  inadequacy  and 
inaccuracy  of  this  method  as  applied  to  such  a  busi- 
ness. A  bolt  is  made  by  heating  the  end  of  a  bar 
of  iron  or  steel  and  inserting  this  in  a  four-hammer 
machine  which  forms  the  head.  The  bar  is  then  cut 
off  at  the  proper  point,  and  the  half-finished  bolt  is 
then  inserted  in  a  thread-cutting  machine,  which 
completes  it.  The  total  machine  work  required  is 
very  much  less  than  that  required  in  the  production 
of  a  nut. 

The  first  step  in  the  production  of  a  nut  is  the 
insertion  into  the  machine  of  a  heated  iron  or  steel 
rod.  From  the  end  of  this  pieces  are  cut,  and 
holes  are  punched  through  them  for  subsequent 
threading.  After  the  rough  blanks  have  been 
cooled  they  are  put  through  a  second  machine/which 
trims  them  down  to  the  right  size.  They  are  next 
passed  through  another  machine,  to  gauge  their 
thickness,  and  then  sent  to  a  drum  for  polishing 
and  cleaning.  They  pass  finally  to  a  thread-cutting 
machine  which  turns  them  into  finished  nuts. 


70  FACTORY   COST  KEEPING 

If  we  were  to  apply  the  percentage-of-material- 
cost  plan  for  the  distribution  of  indirect  expenses  to 
the  manufacture  of  bolts  and  nuts,  the  result  would 
be  to  charge  the  manufacture  of  bolts,  in  which  the 
material  cost  is  high,  with  an  amount  of  indirect 
expense  wholly  disproportionate  to  the  machine  use 
required.  In  the  manufacture  of  nuts,  on  the  other 
hand,  because  the  amount  of  material  used  is  small, 
the  indirect  expenses  charged  will  be  ridiculously 
inadequate  as  a  true  cost  basis. 

But  this  method  is  unsatisfactory  for  other  rea- 
sons. Under  its  operation  the  large-sized  bolts  bear 
a  heavier  amount  of  expense  than  would  bolts  of  the 
smaller  sizes,  in  which  the  amount  of  material  used 
is  considerably  less.  The  machine  work  for  the  pro- 
duction of  different  sized  bolts  is,  however,  exactly 
the  same. 

(4)  PRIME  COST. — Under  the  fourth  method 
indirect  expense  is  distributed  by  adding  to  the 
prime  cost,  i.  e.,  the  combined  labor  and  material 
cost  of  the  product,  a  certain  percentage,  which  will 
in  the  course  of  a  year  equal  the  overhead  expenses 
for  that  time.  This  method  can  be  applied  to  some 
advantage  in  those  businesses  where  the  indirect 
expenses  are  more  or  less  constant.  It  is  subject, 
however,  to  the  same  objections  as  the  methods 


ACCOUNTING  FOR  INDIRECT  EXPENSES     71 

already  discussed,  in  that  the  basis  for  the  charge 
has  no  connection  with  the  amount  of  plant  and 
machinery  used. 

(5)  MACHINE  RATES. — The  best,  and  at  the 
same  time  most  equitable,  method  of  distributing 
indirect  expenses  is  that  frequently  designated  as 
"Machine  Rates."  This  method  requires  the  distri- 
bution of  indirect  expenses  upon  the  basis  of  a 
machine,  a  department,  or  a  process ;  and  the  hardest 
problem  connected  with  its  use  is  the  ascertaining 
of  the  proper  rate  to  be  assigned  to  each  machine, 
department,  or  process.  This  can  always  be  done, 
however,  if  a  scientific  analysis  is  made  of  the 
various  items  composing  the  indirect  costs. 

Classification  of  Indirect  Expenses 

For  the  purpose  of  distribution  by  the  Machine 
Rate  method,  indirect  expenses  can  be  classified  as 
follows : 

I.  The  Cost  of  Floor  Space 

1.  Interest  on  the  investment  in  the  land  and 

buildings 

2.  Depreciation  on  buildings 

3.  Cost  of  repairs  and  maintenance 

4.  Taxes  on  property 

5.  Insurance  on  buildings 


72  FACTORY   COST  KEEPING 

II.  Power  Cost 

i.  Interest  on  investment  in  the  power  plant 

2..  Depreciation  of  the  power  plant 

3.  Cost  of  repairs  and  maintenance 

4.  Taxes 

5.  Insurance 

6.  Fuel 

7.  Wages  of  engineers  and  firemen 

8.  Oil,  waste  and  miscellaneous  supplies 

III.  Machine  Cost 

I.  Interest  on  investment  in  machinery 

2.,  Depreciation  of  machinery 

3.  Cost  of  repairs  and  maintenance 

4.  Insurance 

5.  Miscellaneous  supplies 

IV.  Non-Productive  Supervising  Labor 
i.  Superintendents'  salaries 

2,,  Foremen's  wages 

V.  Miscellaneous  Expenses 

i.  Crane  expense 

2,.  Watchmen's  and  caretaker's  wages 

3.  Supplies  and  sundries 

Floor  Space 

Let  us  now  take  up  each  of  the  classes  of  indirect 
expenses  separately,  beginning  with  the  cost  of  floor 
space.  The  first  item  composing  the  cost  of  factory 


ACCOUNTING  FOR  INDIRECT  EXPENSES     73 

floor  space  is  the  interest  on  the  investment. 
Opinions  differ  as  to  whether  or  not  this  item  should 
be  included  as  a  portion  of  the  manufacturing  cost. 
Many  leading  authorities,  however,  hold  that  rent 
ought  to  be  included  in  the  cost  of  production,  as  it 
represents  an  amount  paid  to  supply  the  necessary 
instruments  (of  production),  and  if  rent  is  included 
as  a  cost  of  production,  it  follows  logically  that 
interest  on  investment  should  also  be  included 
therein. 

To  illustrate,  a  landlord  owning  a  factory  building 
will  require  from  the  lessee  a  rent  to  cover  not  only 
the  expense  of  upkeep,  and  all  amounts  expended 
for  taxes  and  insurance,  but  also  an  adequate  return 
to  him  on  the  amount  of  his  investment.  If  a  manu- 
facturing company  holds  the  dual  position  of  oper- 
ator and  owner  of  its  plant,  this  fact  does  not  alter 
the  relation  as  to  landlord  and  tenant.  If  the  manu- 
facturing company  owns  its  plant,  the  manufacturing 
department  is  in  this  instance  the  tenant,  while  the 
administrative  organization  occupies  the  position  of 
landlord.  In  figuring  the  charge  against  the  manu- 
facturing department  for  the  use  of  the  advantages 
extended  to  it,  interest  on  the  investment  ought 
properly  to  be  included  as  an  item  of  manufacturing 
cost. 

This  can  be  more  easily  understood  if  we  assume 


74  FACTORY   COST  KEEPING 

a  case  in  which  borrowed  money  plays  an  important 
part.  A  manufacturing  company  borrows  $100,000, 
of  which  it  invests  $50,000  in  its  buildings  and 
ground.  The  company  on  its  administrative  side 
pays  the  interest  on  the  $100,000  it  borrowed,  and 
if  the  item  of  interest  on  the  $50,000  invested  in  the 
buildings  and  land  is  not  considered  as  a  manufac- 
turing cost,  the  result  will  be  to  burden  the  adminis- 
trative side  of  the  business  with  the  liability  for  the 
total  amount  of  the  interest  charged.  The  manu- 
facturer who  is  content  to  exclude  from  his  costs  the 
item  of  interest  on  the  investment  in  his  property, 
and  who,  in  close  competition  with  others  in  the  same 
line  of  business,  is  selling  his  goods  at  or  near  his 
final  cost  figures,  will  soon  be  in  a  condition  of  insol- 
vency. Assuming,  however,  that  the  manufacturing 
costs  do  include  the  item  of  interest  on  the  invest- 
ment, the  logical  result  is  that  the  administrative  side 
of  the  company,  instead  of  bearing  the  whole  in- 
terest on  the  $100,000,  is  relieved  of  one-half  of  this 
burden,  which  is  properly  charged  as  a  manufac- 
turing cost  to  the  producing  departments. 

Most  of  the  other  items  included  in  the  cost  of 
factory  floor  space  do  not  require  description.  It 
is  obvious  that  the  cost  of  maintenance  and  repairs, 
the  amount  of  taxes,  the  cost  of  insurance,  ought  all 
to  be  included  as  items  in  the  total  floor  space  cost, 


ACCOUNTING  FOR  INDIRECT  EXPENSES     75 

This  leaves  depreciation  on  buildings  to  be  con- 
sidered. Depreciation  has  been  defined  as :  "A 
shrinkage  in  value  which,  in  the  ordinary  course  of 
events,  may  be  expected  to  take  place,  as  being  a 
necessary  consequence  of  the  possession  and  enjoy- 
ment of  the  asset ;  it  consequently  is  a  charge  against 
revenue.  Fluctuation,  on  the  other  hand,  arises 
from  causes  entirely  outside  the  scope  of  the  busi- 
ness, and  may  affect  the  value  of  its  assets  either 
adversely  or  favorably." 

Depreciation  of  buildings  is  distinctly  an  element 
of  floor  space  cost.  The  manufacturer  who  does 
not  provide  a  certain  amount  out  of  revenue  against 
wear  and  tear  of  his  plant  is  overstating  his  profits ; 
for  at  the  end  of  the  producing  lifetime  of  his  plant 
he  finds  himself  under  the  necessity  of  replacing  it 
and  has  no  reserves  for  the  purpose.  If  his  book 
profits  have  been  paid  out  to  the  stockholders,  the 
result  is  an  impairment  of  capital  which  will  subse- 
quently mean  a  loss  of  income  and  principal  to  those 
having  funds  invested  in  the  business. 

Having  ascertained  by  the  experience  of  prior 
years,  or  by  careful  estimate,  the  total  cost  of  floor 
space  for  a 'given  period  of  time,  the  manufacturer 
has  to  adopt  a  method  for  the  distribution  of  this 
cost  over  the  producing  departments,  or  the  pro- 
ducing agents  within  the  department. 


76  FACTORY   COST  KEEPING 

The  unit  of  floor  space  is  the  square  foot ;  and  the 
cost  per  square  foot  may  be  determined  in  one  of  two 
ways.  The  first  method  consists  in  assigning  to 
each  floor  in  a  manufacturing  plant  its  estimated 
share  of  the  floor  space  cost.  For  instance,  a  manu- 
facturing building  with  four  stories  may  charge 
the  department  located  on  the  ground  floor  with  a 
smaller  cost  than  that  assigned  to  the  departments 
using  the  second,  third  or  fourth  floors.  In  some 
cases  this  method  of  assigning  floor  space  cost  is 
equitable;  but  more  often  we  find  that  it  is  unjust 
to  those  departments  which,  through  accident  of 
construction,  are  located  in  the  less  desirable  portions 
of  the  plant. 

The  second  method  for  the  determination  of  the 
square  foot  rate  of  cost  is  obtained  by  dividing  the 
total  floor  space  area  of  the  building  into  the  total 
cost  of  furnishing  floor  space,  and  thus  arriving  at 
the  average  cost  per  square  foot.  By  this  method  no 
one  department  is  preferred  above  any  other;  and 
regardless  of  special  advantages  of  location  the 
square  foot  cost  is  the  same  throughout  the  entire 
structure. 

Distributing  Floor  Space  Costs 

Each  machine  is  "assessed"  according  to  the  floor 
space  actually  occupied.  In  order  to  do  this  equita- 


ACCOUNTING  FOR  INDIRECT  EXPENSES     77 

bly,  careful  measurements  must  be  made.  The 
area  of  the  floor  space  assignable  to  each  machine 
must  not  be  reckoned  as  the  space  actually  occupied 
by  that  machine,  but  must  include  sufficient  working 
room,  as  well  as  a  certain  portion  of  the  aisle  space. 
Having  ascertained  the  total  square  foot  area 
occupied  by  each  machine  in  a  given  plant,  the  floor 
space  cost  per  machine  can  be  arrived  at  by  multiply- 
ing the  square  foot  cost  by  the  area  occupied.  Where 
departments  use  no  machinery,  the  area  occupied 
by  the  entire  department  is  ascertained  and  this  is 
then  multiplied  by  the  square  foot  cost. 

Power  Cost 

We  now  turn  to  the  second  general  division  of  the 
indirect  expenses.  Power  costs  are  made  up  of  eight 
items,  as  stated  in  our  general  classification,  the  first 
five  of  these  being:  (i)  interest  on  investment  in 
power  plant,  (2)  depreciation  of  power  plant,  (3) 
costs  of  repairs  and  maintenance,  (4)  taxes,  and 
(5)  insurance;  all  of  which  are  determined  accord- 
ing to  the  rules  already  laid  down  and  discussed  in 
the  case  of  floor  space.  The  new  points  are  those 
involved  in  the  last  three  items;  namely,  fuel  cost, 
the  wages  of  engineer  and  firemen,  and  oil,  waste 
and  miscellaneous  supplies.  These  three  items 


78  FACTORY   COST   KEEPING 

represent  the  outlays  made  for  the  actual  operation 
of  the  power  plant. 

These  two  general  classes  of  expense,  though  of 
different  nature — the  first  covering  the  return  on 
the  investment  and  the  amount  of  money  neces- 
sary to  perpetuate  it,  and  the  second  the  neces- 
sary expense  for  producing  the  required  amount 
of  power — are,  however,  united  in  a  single  charge 
for  power  based  on  the  horse-power  consumed. 
If  a  company  purchases  its  power  from  a  power 
company,  the  charge  is  usually  made  according 
to  contract  rates.  The  basis  for  charging  is  the 
amount  of  horse-power  consumed  during  a  given 
period.  In  case  the  plant  uses  electricity,  the 
charge  would  be  based  upon  the  number  of  kilo- 
watt hours. 

Let  us  take  a  simple  illustration.  A  certain 
plant  consumes  an  average  of  2,000  kilowatt  hours 
per  day;  that  is  to  say,  there  are  2,000  K.  W.  H. 
of  energy  delivered  to  the  mill  from  the  power- 
house. A  certain  amount  of  this  energy  is  lost 
at  the  motor,  while  still  more  is  consumed  in  the 
friction  of  the  shafting  and  the  loss  due  to  slip- 
ping of  belts.  Thus  an  actual  test  shows  that  the 
machinery  receives  and  consumes  only  1,900  K. 
W.  H.  of  energy.  In  determining  the  cost,  how- 
ever, the  accounting  department  will  take  the 


ACCOUNTING  FOR  INDIRECT  EXPENSES     79 

actual  consumption  of  power  by  the  machinery 
and  divide  this  into  the  total  power  bill.  This 
gives  an  actual  power  cost  per  unit  in  excess  of 
the  rate  charged  by  the  power  company,  for  each 
machine  is  directly  charged  with  its  proportion 
of  the  loss  of  energy.  The  total  power  expense 
will  now  be  apportioned  among  the  various  ma- 
chines, according  to  the  relation  which  their 
power  consumption  bears  to  the  total  power  con- 
sumption of  all  the  machinery. 

In  case  the  manufacturing  company  produces 
its  own  power,  this  system  of  apportioning  the 
power  cost  will  need  but  little  modification.  The 
various  items  going  to  make  up  the  expenses 
chargeable  to  the  power  department  are  ascer- 
tained, just  as  though  they  were  the  expenses  of 
an  independent  business.  The  amount  of  horse- 
power consumed  by  the  various  machines  is  then 
determined  and  the  rate  per  horse-power  is  se- 
cured by  dividing  the  total  consumption  into  the 
total  expenses  of  the  power  department.  The 
distribution  over  each  machine  then  becomes  an 
easy  matter. 

Some  concerns  do  not  follow  the  practice  of 
including  the  power  cost  as  an  item  in  the  ma- 
chine rate,  but  consider  it  as  a  separate  cost  unit. 
Where  this  system  is  followed  the  power  cost  is 


80  FACTORY   COST  KEEPING 

carried  as  a  separate  item,  and  in  determining 
manufacturing  cost  the  power  cost  must  be  added 
to  the  cost  of  the  product  as  it  comes  from  the 
machine.  This  system  is  advantageous  in  those 
cases  where  the  power  consumption  of  any  large 
group  of  machines  is  irregular,  so  that  the  amount 
of  power  likely  to  be  consumed  is  difficult  to  esti- 
mate in  advance. 

Machine  Cost 

The  third  group  of  indirect  expenses  gives  the 
accountant  little  trouble  in  apportioning,  as  ma- 
chinery costs  are  figured  on  the  basis  of  each  in- 
dividual machine. 

Non-Productive  Supervising  Labor 

The  fourth  group  deals  with  non-productive 
labor.  The  main  items  here  are  the  salaries  of  the 
superintendent  and  foremen.  These  expenses  are 
not  apportioned  upon  the  basis  of  the  machinery, 
as  in  the  case  of  others,  but  according  to  the 
number  of  men  employed  in  the  various  depart- 
ments. The  superintendent,  or  foreman,  is  a 
manager  of  men,  not  of  machinery,  and  it  is  there- 
fore proper  to  prorate  his  time  on  the  former 
basis  rather  than  the  latter.  As  regards  the  dis- 


ACCOUNTING  FOR  INDIRECT  EXPENSES     81 

tribution  to  machines,  therefore,  the  number  of 
operators  on  each  furnishes  the  basis  of  the 
charge.  For  instance,  a  lathe  requiring  the  ser- 
vices of  one  man  will  be  charged  with  the  same 
non-productive  labor  cost  as  will  a  group  of  three 
automatic  screw  machines  located  in  the  same 
department  and  operated  by  one  man.  The  cost 
per  machine,  however,  will  in  the  latter  case  be 
only  one-third  the  cost  chargeable  in  the  case  of 
the  former. 

Miscellaneous  Expenses 

The  final  item  in  indirect  expense  cost  is  com- 
posed of  the  miscellaneous  expenses  which  for  il- 
lustrative purposes  are  listed  in  the  classification 
as  "crane  expense,"  "watchmen's  and  caretaker's 
wages,"  "supplies  and  sundries."  These  vary  with 
every  industry,  and  cannot  be  subdivided  except 
on  more  or  less  arbitrary  bases.  The  accountant 
usually  uses  his  judgment  as  to  what  will  secure 
the  most  accurate  results  in  the  distribution  of 
miscellaneous  expenses  and  completes  his  system 
accordingly. 

Distribution  of  Costs  Over  Output 

The  total  expenses  properly  chargeable  to  each 
machine  during  a  year  are  ascertained  by  adding 


82  FACTORY  COST  KEEPING 

together  the  several  group  costs,  and  when  this 
has  been  done  the  accountant  proceeds  to  reduce 
these  to  such  a  basis  that  they  may  be  appor- 
tioned over  the  work  turned  out  by  the  machines. 
The  usual  method  of  accomplishing  this  is  to  di- 
vide the  costs  on  an  hourly  basis.  The  account- 
ant finds  out  how  many  hours  during  the  year  the 
machine  has  been  or  will  be  employed,  as  nearly 
as  this  can  be  done.  The  total  number  of  hours 
is  then  divided  into  the  total  expenses  assignable 
to  the  machine,  and  the  result  is  the  hourly  rate. 

There  has  been  much  controversy  about  the 
best  method  to  pursue  in  determining  the  normal 
operating  time  of  machinery.  Some  accountants 
claim  that  the  machinery  should  be  divided  into 
classes,  the  first  containing  those  machines  whose 
operation  is  continuous  throughout  the  year;  the 
second,  those  which  are  not  in  continual  use, 
being  required  only  for  special  work;  and  the 
third,  that  class  of  machines  not  of  the  highest 
efficiency,  but  held  in  reserve  to  meet  emergen- 
cies. The  best  method,  however,  is  to  figure  the 
normal  operating  time  of  each  machine,  or  group 
of  machines  of  the  same  kind. 

The  following  illustration  shows  the  fixing-  of 
the  hourly  rate  for  three  Hartford  Automatic 


ACCOUNTING  FOR  INDIRECT  EXPENSES    83 

Screw   Machines   costing  $1,382.24,    which   would 
normally  run  2,619  hours  in  the  year: 

DISTRIBUTION  OF  INDIRECT  EXPENSES 

Cost  of  floor  space $193.52 

Power  cost 383.69 

Machine  cost,  including  tool  ex- 
pense   961.88 

Non-productive  labor  (superin- 
tendence, with  one  operator 
running  the  group) 93.80 

Miscellaneous   expenses 16.32 


$1,649.21 

$1,649.21  divided  by  2,619  hours  equals  approxi- 
mately 63  cents,  the  hourly  rate  for  the  group,  or  2 1 
cents  for  each  machine. 

This  hourly  rate  is  usually  stamped  on  a  metal 
plate  affixed  to  the  machine. 

Idle  Time  Supplementary  Rate 

The  end  sought  by  the  cost  department  is  to 
apportion  to  each  piece  of  work,  in  an  equitable 
manner,  such  a  sum  as  will  give,  approximately  at 
least,  its  cost,  and — in  the  aggregate,  at  the  end  of 
the  year — the  total  amount  of  indirect  expense 


84  FACTORY   COST   KEEPING 

actually  incurred.  Thus,  the  system  of  calculating 
and  distributing  indirect  expenses  is  obviously  not 
complete  unless  some  provision  is  made  for  keeping 
track  of  the  idle  hours  of  machines.  When  this  is 
not  done,  the  total  cost  of  a  piece  of  work  is  figured 
according  to  the  hourly  rate  stamped  upon  the  ma- 
chine, and  if  it  takes  four  hours  to  complete,  the  cost 
department  figures  the  cost  by  taking  four  times 
the  hourly  rate  of  the  particular  machine  involved. 
The  hourly  rate,  however,  is  nothing  but  a  some- 
what arbitrary  sum  which  has  been  fixed  to  make 
easier  and  more  accurate  the  compilation  of  the  cost, 
and  while  the  plan  works  satisfactorily  so  long  as 
a  machine  is  constantly  employed,  it  fails  when  the 
machine  is  intermittently  idle. 

Referring  to  our  illustration  of  the  Hartford 
Automatic  Screw  Machines,  the  indirect  expenses 
were  $1,649.21.  The  hourly  rate  of  21  cents  is 
accurate  only  ^so  long  as  the  machine  is  employed 
2,619  hours.  But  let  us  suppose  that  the  plant  en- 
counters a  period  of  depression  during  which  it  is 
impossible  to  secure  orders  to  keep  the  machines 
employed  more  than  half  the  time.  To  be  exact,  the 
cost  department  figures  that  the  annual  business, 
upon  which  it  has  to  calculate  its  indirect  expenses, 
is  enough  to  keep  the  machines  busy  exactly  1,300 
hours.  Now  let  us  see  how  this  will  alter  the  indirect 


ACCOUNTING  FOR  INDIRECT  EXPENSES     85 

expenses  in  the  case.  The  1,300  hours,  at  the  normal 
rate  of  21  cents  per  hour,  will  amount  to  $273  for 
each  machine,  or  $819  for  the  three.  The  indirect 
expenses  for  the  year  under  these  abnormal  con- 
ditions will  not  vary  much  from  those  incurred 
under  normal  operating  conditions,  but  less  than  half 
of  the  indirect  expenses  chargeable  to  the  machines 
has  been  provided  for.  There  will  then  be  a  de- 
ficiency equal  to  the  difference  between  $819  and 
$1,649.21,  or  $830.21.  In  order  properly  to  appor- 
tion this  amount,  a  supplementary  rate  is  frequently 
used,  by  which  this  expense  is  distributed  as  an 
additional  cost.  In  our  illustration  the  supplement- 
ary rate  would  be  21.3  cents;  and  in  making  the 
calculation  on  this  basis  the  normal  rate  of  21  cents 
would  be  used  and  the  supplementary  rate  of  21.3 
cents  would  be  added. 

Idle  Capacity  Account 

The  distribution  of  indirect  expenses  upon  the 
supplementary  rate  plan  is  exceedingly  unjust  and 
generally  unsatisfactory.  The  calculations  are 
based,  in  the  first  place,  upon  the  ability  of  the  com- 
pany to  gauge  in  advance  the  number  of  hours  dur- 
ing which  the  plant  is  likely  to  be  operated.  Under 
conditions  of  uncertain  demand  this  is  almost  im- 
possible. A  better  method  is  to  provide  for  the 


86  FACTORY   COST   KEEPING 

charging  of  idle  time  to  an  Idle  Capacity  account, 
whose  balance  at  the  end  of  the  year  is  charged  to 
profit  and  loss.  Let  us  suppose  that  we  take  a 
machine  which  on  a  nine-hour  day  will  have  an 
indirect  expense  rate  of  20  cents  an  hour.  On  a 
certain  day  this  machine  is  used  only  six  hours  on 
productive  work,  being  idle  the  remaining  three 
hours.  At  the  normal  rate  the  indirect  expenses 
would  be  equal  to  six  times  20  cents,  or  $1.20;  but 
this  would  leave  the  three  idle  hours  still  unac- 
counted for.  Therefore,  the  Idle  Capacity  account 
is  charged  for  three  hours  of  idle  time  at  the  regu- 
lar hourly  rate;  and  the  idle  charge  on  this  particular 
machine  for  this  day  is  60  cents.  The  journal 
entries  for  the  day  could  be  summarized  as  follows : 

Manufacturing  Account $1.20 

Idle  Capacity  Account 60 

To  Indirect  Expense. . .  .  $1.80 

These  entries  could  then  be  posted  to  the  three 
general  ledger  accounts  involved.  The  Indirect 
Expense  account  in  the  general  ledger  represents  the 
total  expenses  as  shown  in  the  indirect  expense 
ledger.  This  ledger  is  a  subsidiary  book,  sometimes 
called  a  "Machine  Rates  Ledger,"  and  generally  con- 
tains all  the  various  accounts  already  outlined  which 
go  to  make  up  the  indirect  expenses. 


ACCOUNTING  FOR  INDIRECT  EXPENSES     87 

One  of  the  best  indicia  of  the  efficiency  of  a  plant 
is  the  comparative  size  of  the  Idle  Capacity  account ; 
for  its  ratio  to  the  total  amount  of  indirect  expenses 
is  an  index  of  the  manager's  success  in  keeping  his 
machinery  employed. 

One  of  the  main  offices  of  cost  keeping  is  to  show 
leakage.  In  the  case  of  materials  we  have  seen  that 
any  leaks  in  stores  are  set  forth  in  the  "Inventory 
Adjustment  Account,"  while  the  balance  of  the 
"Labor  Account"  will  show  any  waste  in  productive 
labor.  This  same  principle  is  adhered  to  in  the  case 
of  the  indirect  expenses,  for  the  "Idle  Capacity 
Account"  is  the  gauge  which  reflects  the  extent  to 
which  the  capacity  of  the  plant  is  not  utilized. 


CHAPTER  V 
SUMMARY 

As  a  last  step  in  our  study  of  factory  accounting, 
let  us  see  how  the  work  of  cost  keeping  is  actually 
carried  on.  The  basis  for  calculating  the  cost  of 
any  piece  of  work  is  furnished  by  the  manufacturing 
or  production  order,  which  also  gives  the  authoriza- 
tion for  the  various  departments  to  proceed  with 
the  execution  of  the  work. 

The  manufacturing  order  can  be  used  in  an  in- 
dustry turning  out  a  uniform  product  or  a  specialized 
product,  in  one  organized  under  the  department 
system,  whereby  the  department  is  made  the  basis 
for  all  cost  charges,  or  in  one  operated  under  the 
contract  system,  whereby  the  contract  is  made  the 
basis  for  the  cost  charges. 

The  usual  origin  of  the  manufacturing  order  is 
with  the  customer,  who  gives  instructions  for  the 
production  of  a  certain  commodity.  To  illustrate, 

88 


SUMMARY  89 

let  us  assume  that  the  customer  comes  in  with  plans 
and  specifications  for  a  traveling  crane.  He  presents 
the  plans  and  calls  for  an  estimate  upon  its  produc- 
tion. The  estimate  will  be  submitted  to  him,  and  if 
satisfactory  the  order  is  placed.  Thereupon  a  manu- 
facturing order  is  transmitted  to  the  shops,  directing 
the  manufacturing  departments  to  produce  the  desig- 
nated article.  The  manufacturing  order,  numbered 
to  correspond  with  its  account  appearing  in  the  cost 
ledger,  will  be  the  basis  for  all  charges  entering  into 
the  production  of  the  crane. 

We  have  already  discussed  the  handling  of  the 
storehouse,  which  takes  care  of  all  materials  from  the 
time  they  are  received  until  given  out  to  the  manu- 
facturing departments.  We  saw  that  the  work  of 
the  storehouse  keeper  was  threefold;  first,  keeping 
a  record  of  materials  received;  second,  keeping  a 
record  of  materials  issued;  third,  guarding  against 
the  accumulation  of  materials  in  the  storeroom. 

It  has  been  shown  that  the  storehouse  ledger  is 
the  subsidiary  ledger  for  the  recording  of  stores 
received  and  issued,  being  controlled  by  the  Stores 
account  in  the  general  ledger.  When  we  take  up 
the  operating  departments,  we  meet  another  set  of 
similarly  controlled  accounts.  In  other  words,  we 
have  a  manufacturing  account  in  the  general  ledger 


90  FACTORY   COST   KEEPING 

controlling  the  factory  cost  ledger.  The  same  con- 
trol exercised  by  the  Stores  account  in  the  general 
ledger  over  the  stores  ledger  is  found  in  the  case  of 
the  Manufacturing  account  in  its  control  of  the  cost 
ledger.  In  the  stores  ledger  the  debit  side  is  for 
materials  received,  the  credit  side  for  materials 
issued.  In  the  cost  ledger  we  record  on  the  debit 
side  of  each  account  all  costs  entering  into  the  pro- 
duction of  the  order.  Included  in  this  cost  are  mate- 
rials, labor,  and  indirect  expenses. 

The  voucher  upon  which  materials  are  issued  from 
stores  to  the  operating  departments,  which  is  usually 
termed  the  "stores  requisition,"  is  posted  to  the  credit 
of  the  proper  material  account  in  the  stores  ledger. 
The  offsetting  debit  is  posted  to  the  account  of  the 
manufacturing  order  in  the  cost  ledger,  as  showing 
the  charge  to  the  production  order  upon  which  the 
materials  have  been  issued. 

To  the  material  cost  there  must  be  added  the 
other  expenses  incurred  in  producing  the  finished 
article,  in  order  to  give  the  total  cost  of  goods  in 
process.  Labor  costs  are  chargeable  to  the  various 
orders  in  process  from  the  work  tickets  of  the  pro- 
ducing laborers,  while  the  indirect  expenses  are 
charged  from  the  same  voucher,  which  should 
specify  the  numbers  of  the  machines  employed  on 
the  work.  The  following  is  a  specimen  of  the 


SUMMARY  91 

summary  entries  which  are  made  at  stated  intervals 
in  the  general  books : 

Manufacturing 
Idle  Capacity 

To  Stores 

Labor 

Indirect  Expenses 

The  Manufacturing  account,  as  above,  comprises 
all  the  items  of  production  cost  chargeable  to  goods 
in  process.  Referring  to  the  illustration  of  the  travel- 
ing crane,  the  amount  of  its  cost  would  be  included 
as  one  of  the  items  in  the  makeup  of  the  amount 
charged  to  manufacturing. 


The  principles  of  factory  accounting  are  always 
the  same,  though  their  application  may  vary  widely. 
This  must  be  kept  constantly  in  mind  by  the  ac- 
countant and  manufacturer,  as  the  ability  to  adapt 
the  principles  of  cost  accounting  to  the  require- 
ments of  a  plant  is  an  important  factor  in  securing  its 
economic  handling,  and  in  securing  therefrom  the 
best  results. 


INDEX 

A 

Accountancy,  development  of,  7,  8 

accounting  'records  as  part  of  accounting  systems,  7 

efficiency,  demand  for  in  industry,  8 

factory  costs,  ascertaining,  7 
Accounting, 

indirect  expenses,  accounting  for,  63-87 

labor,  accounting  for,  44-62 

stores,  accounting  for,  22-43 
Actual  inventory  of  stores,  22,  23,  38-43 

B 

Bills  of  materials,  36 

Book  inventory,  22,  23,  38-43 

Bookkeeping,  cost  accounting  a  development  of,  8 

Books  of  account, 

relation  between  cost  and  general  books,  14-19 

Diagram,  15 
relation  between  stores  records  and  commercial  books,  24,  25 

Diagram,  25 
Buildings,  depreciation  of,  75 

C 

Cards, 

stores  ledger  cards,  16,  33-35,  37,  38 

Diagram,  34 
tally  cards,  35-37,  41 

time  cards  (See  "Time  recording  devices") 
Classification  of  indirect  expenses,  71,  72 
Classification  of  merchandise  expenditures,  10,  n 
Commercial  books,  relation  of  stores  records  to,  24,  25 

Diagram,  25 

Cost  accounting,  a  development,  8,  9 
factory  cost  accounting,  basis  of,  8,  9 

system  of  accounting,  adaptation  of,  to  classes  of  expense,  9 
92 


INDEX  93 

Cost  and  general  books,  relation  between,  14-19 

Diagram,  15 

entries,  necessary,  from  factory  standpoint,  17 
factory  accounting,  efficiency  reached  in,  17 
factory  cost  books,  relation  of,  to  general  commercial  books,  14, 15 

Diagram,  15 
goods  in  process,  cost  of,  controlled  by  debit  to  general  ledger, 

17 
journal  form,  ordinary,  in  small  business  versus  large  business, 

15,  16 

manufacturing  profit,  shown  by  sales  account,  19 
material  cost,  aggregate  of,  17 
stores,  issuance  of,  versus  transfer,  18 
stores  issued,  consumed  by  orders  in  process,  17 
vouchers,  as  medium  in  transfer  of  finished  stock,  18 
Cost  keeping,  ends  attained  by,  8 

cost  keeping,  advantages  of,  to  manufacturer,  8 
cost  records,  reasons  for,  8 
waste,  elimination  of,  8 
Cost  keeping,  process  of,  13,  14 

finished  stock,  storage  and  issuance  of,  14 
materials,  distribution  of,  to  various  departments,  13 
production  expense,  applied  to  each  unit,  14 
Cost  records  (See  "Stores  records,"  "Time  Recording,"  etc.) 

reasons  for  cost  records,  8 
Cost  system  (See  also  "Accounting") 
advantages  of  cost  system,  19,  2,1 
arrangement  of  factory  cost  system,  19,  21 
manufacturing  cost  factors,  21 
operation  of  cost  system,  19,  20 

Diagram,  20 

organization  of  cost  system,  21 
sales,  subdivision  of,  21 
Costs, 

comparison  of  material  and  labor  costs,  44,  45 

indirect  expenses,  63-87  (See  also  "Indirect  expenses") 

labor  costs,  44-62,  65-67  (See  also  "Labor") 

method  of  distributing  expense  burden,  65-67 

recording  labor  costs,  59,  60 
manufacturing  costs,  elements  of,  13,  21 
material  costs,  22-43,  68-70  (See  also  "Material,"  also  "Stores") 

method  of  distributing,  68-70 
prime  cost  as  a  basis  for  distributing  expense  burden,  70,  71 


94  INDEX 

Costs,  distribution  of,  over  output,  81-83 

expenses  chargeable  to  each  machine,  ascertaining,  81,  82 

hourly  rate  of  machines,  82,  83 

operating  time  of  machinery,  82 
Creditors  accounts,  26 

D 

Decimal  system  of  designating  and  arranging  materials,  31-33 
Depreciation,  75 

Differences  between  actual  and  book  inventories,  40-43 
Direct  labor  cost  method  of  distributing  expense  burden,  65-67 

advantages  of  method,  65 

complete  cost  of  article,  ascertaining,  65 

hand  work,  elimination  of,  66 

weaknesses  of  method,  65-67 
Direct  labor  hour  method  of  distributing  expense  burden,  67,  68 

indirect  expense  per  man  hour,  ascertaining,  67 

manufacturing  cost,  ascertaining,  67 

results  of  direct  labor  hour  method  not  always  accurate,  68 
Distribution  of  costs  over  output,  81-83 

Distribution    of    expense    burden,    methods,     64-71     (See    also 
"Methods") 

E 

Efficiency,  8 

Expenditures,  merchandise,  classification  of,  10,  n 
Expenditures,  temporary  and  permanent,  10 

distinction  in  expenditures,  for  cost  accounting  purposes,  10 
Expense  burden,  methods  of  distribution,  64-71 

direct  labor  cost,  65-67 

direct  labor  hour,  67,  68 

machine  rates,  71 

material  cost,  68-70 

prime  cost,  70,  71 
Expenses  (See  also  "Costs") 

adaptation  of  accounting  system  to  classes  of  expenses,  9 

general  expenses,  subdivision  of,  10,  n 

indirect  expenses,  63-87  (See  also  "Indirect  expenses") 

F 
Floor  space  costs,  71-77 

buildings,  depreciation  of.  an  element  of  floor  space  cost,  75 
cost  of  factory  floor  space,  items  composing,  72,  73 
depreciation,  definition  of,  75 


INDEX  95 


Floor  Space  Costs — (Continued.) 

distribution  of  floor  space  costs,  76,  77 
ascertaining  floor  space  cost,  77 
assessment  of  machines,  76 
fluctuation,  75 

square  foot  rate  of  cost,  determination  of,  76 
Fluctuations  in  value,  75 
Foremen's  salary,  apportionment  of,  80 


General  expenses,  subdivision  of,  10,  II 
General  ledger,  analysis  of,  u,  12 

Diagram,  12 
General  ledger  labor  account,  61,  62 

difference  existing  between  labor  paid  for  and  labor  charged,  61 

entries,  posting,  61 

loss,  in  stores  and  direct  labor,  62 

H 

Hourly  rate,  definition  of,  84 

I 
Idle  capacity  account,  85-87 

supplementary  rate  plan,  unsatisfactory  in  distributing  indirect 

expenses,  85 

Idle  time  supplementary  rate,  83-85 
illustration  of  method,  84,  85 

unsatisfactory  plan  in  distributing  indirect  expense,  85 
Indirect  expenses,  accounting  for,  63-87 
classification  of  indirect  expenses,  71,  72 
distribution  of  costs  over  output,  81-83 
floor  space  cost,  71-77 
distributing,  76,  77 

importance  of  indirect  expenses,  63,  64 
idle  capacity  account,  85-87 
idle  time  supplementary  rate,  83-85 
machine  cost,  72,  80 

methods  of  distributing  expense  burden,  64-71 
direct  labor  cost,  65-67 
direct  labor  hour,  67,  68 
machine  rates,  71 
material  cost,  68-70 
prime  cost,  70,  71 


96  INDEX 

Indirect  Expenses,  Accounting  for — (Continued.) 

miscellaneous  expenses,  72,  81 

non-productive  supervising  labor,  72,  80,  81 

power  cost,  72,  77-80 
Indirect  expenses,  classification  of,  71,  72 

floor  space  cost,  71 

machine  cost,  72 

miscellaneous  expenses,  72 

non-productive  supervising  labor,  72 

power  cost,  72 
Indirect  expenses,  importance  of,  63,  64 

factory   indirect   cost,   increased   by  improvement   in  manufac- 
turing, 63,  64  , 

production,  true  cost  of,  64 
Inventories,  22,  23,  38-43 

actual  inventory,  22,  23,  38-43 
advantages  of,  40 

book  inventory,  22,  23,  38-43 
advantages  of,  39 

book  inventory  versus  actual  inventory,  38-40 

material  on  hand,  determined  by  stores  ledger,  39 

reconciling  inventories,  40-43 

trial  balance,  purpose  of,  39 
Issuing  stores,  27-29,  37,  38 
Diagram,  29 

materials  for  producing  departments,  27 

report,  basis  for  journal  entry,  28 

stores  requisition,  27-29 
Diagram,  29 

vouchers,  origination  of,  27 

J 

Job  tickets,  49,  55-59 

relation  of  time  cards  to  job  tickets,  49,  50 
Diagram,  50 

K 

Keeping  up  stores,  36-38 
consumption,  rate  of,  37 

ledger  card,  as  information  for  storekeeper,  37,  38 
low  limits,  practical,  37 

order  quantity,  for  material  to  be  used,  36,  37 
tally  cards,  as  basis  for  re-ordering,  37 


INDEX  97 


Labor  account  in  general  ledger,  61,  62 
Labor,  accounting  for,  44-62 

general  ledger  labor  account,  61,  62 

materials  and  labor  compared,  44,  45 

methods  of  recording  time,  45-50 

paying  the  workmen,  60,  61 

piece  work,  49,  51 

recording  labor  costs,  59,  60 

relation  of  time  cards  to  work  tickets,  49,  50 
Diagram,  50 

Taylor  premium  plan  of  wage  payment,  52-54 

time  recording  devices,  48,  49,  55-59 

Towne-Halsey  plan  of  wage  payment,  51,  52 
Labor  and  material  costs  combined,  as  a  basis  for  distribution  of 

expense  burden,  70,  71 

Labor  costs,  as  a  basis  for  distribution  of  expense  burden,  65-67 
Labor  costs,  recording,  59,  60 

laborers,  amount  owing  to,  for  work  performed,  60 

manufacturing  cost,  a  controlling  account  of  cost  ledger,  59 
Labor  hour,  as  a  basis  for  distributing  expense  burden,  67,  68 
Labor,  non-productive,  costs  of,  72,  80,  81 
Leakage  and  waste,  8,  21,  87 
Ledger,  general,  analysis  of,  n,  12 

Diagram,  12 

Ledger,  general,  labor  account,  61,  62 
Ledger,  stores,  16,  33-35,  37-39,  89,  90 
Diagram,  34 

M 

Machine  cost,  72,  80 

Machine  hour,  as  a  basis  for  distributing  costs,  81-86 
Machine  rates,  as  a  basis  for  distributing  expense  burden,  71 

items  of  indirect  costs,  scientific  analysis  of,  71 
Machines,  floor  space  cost  of,  76,  77 
Manufacturing,  conversion  of  values  in,  19,  20 

progress  of  factory  work,  19,  20 

Diagram,  20 
Manufacturing  cost,  elements  of,  13,  21 

expenditures,  classification  of,  13 

production  cost,  shown  by  factory  cost  books,  13 
Manufacturing  order,  28,  30,  88,  89 

Material  and  labor  cost  combined,  as  a  basis  for  distributing  ex- 
pense burden,  70,  71 


98  INDEX 

Material  cost,  as  a  basis  for  distributing  expense  burden,  68-70 

method  not  always  satisfactory,  69,  70 
Materials  (See  also  "Stores") 
Materials  and  labor,  comparison  of,  44,  45 

labor  cost,  as  charged  to  goods  in  process  of  manufacture,  45 

materials,  from  standpoint  of  bookkeeping,  44,  45 

methods  of  recording  costs,  difference  in,  44,  45 

value  received,  represented  by  credit,  45 
Materials,  bills  of,  36 

provision  for  materials,  36 

requirements,  shown  by  bill  of  materials,  36 
Materials,  designating  and  arranging,  31-33 

classes,  number  of,  increased,  33 

decimal  system,  31-33 
modification  of,  32 

numbers,  as  descriptive  of  material,  31 
Merchandising  expenditures,  classification  of,  10,  n 

expenditures,  distinction,  in  profit  and  loss,  10 

general  expense,  subdivision  of,  10,  u 

merchandise  payments,  subdivision  of,  n 
Methods  of  distributing  expense  burden,  64-71 

direct  labor  cost,  65-67 

direct  labor  hour,  67,  68 

machine  rates,  71 

material  cost,  68-70 

prime  cost,  70,  71 
Methods  of  paying  wages,  49-54 

piece  work  plan,  49,  51 

Taylor  premium  plan,  52-54 

Towne-Halsey  plan,  51,  52 
Methods  of  recording  time,  45-50 
Miscellaneous  expenses,  72,  81 

variation  of  miscellaneous  expenses,  81 

N 
Non-productive  supervising  labor,  72,  80,  81 

O 

Order,  production,  28,  30,  88,  89 
Order,  quantity,  for  material,  36,  37 
Overhead  expense  (See  "Expense  burden") 


INDEX  99 


Payment  of  wages,  49,  51-54,  60,  61 

method  of  paying  the  workmen,  60,  61 

piece  work  plan,  49,  51 

Taylor  premium  plan,  52-54 

Towne-Halsey  plan,  51,  52 
Permanent  and  temporary  expenditures,  10 
Physical  inventories,  22,  23,  38-43 
Piece  work  system  of  paying  wages,  49,  51 

disadvantages  of  system,  49,  51 

prevention  of  loss  of  time,  49 

undue  labor  costs,  elimination  of,  49 
Plans  (See  "Methods") 
Power  cost,  72,  77-80 

apportionment  of  power  expense,  79 

items  composing  power  cost,  77 
Prime  cost  method  of  distributing  expense  burden,  70,  71 

objections  to  method,  70,  71 
Production  cost,  elements  of,  13,  21 
Production  order,  28,  30,  88,  89 

definition  of  production  order,  28 

finished  goods,  cost  of,  ascertained,  30 

necessity  for  production  order,  28 
Profit  and  loss  expenditures,  10 
Purchase  book,  26 

R 

Rates,  machine,  method  of  distributing  expense  burden,  71 
Receiving  stores,  24,  26,  27 

accounting  in  stores  department,  26,  27 

creditors  accounts,  status  of,  26 

purchase  book,  economy  in,  26 
Reconciling  inventories,  40-43 

book  adjustment,  necessity  for,  41 

book  adjustment,  pending  investigation,  42 

correction  on  tally  card,  41,  42 

difference,  cause  of,  between  actual  inventory  and  book  record, 
40,  41 

fiscal  year,  end  of,  43 

material,  money  paid  for,  42,  43 

quantity  item,  correction  of,  41,  42 
Recording  labor  costs,  59,  60 


100  INDEX 

Recording  time,  methods  of,  45-50 
gatekeeper  as  time  recorder,  45,  46 
gatekeeper's  record  for  payroll  purposes,  46 
mechanical  devices  for  recording  time,  48,  49 
time  cards,  relation  of,  to  work  tickets,  49,  50 

Diagram,  50 
time  systems,  weakness  of,  46-48 

Records,  stores,  15-19,  22-24  (See  also  "Stores  records") 

Report,  storekeeper's,  28 

Requisition,  stores,  27-29,  37,  38,  90 
Diagram,  29 


Salary  expense,  superintendent  and  foremen,  80 
Sales  account,  19,  21 
Storekeeper's  report,  28 
Stores,  accounting  for,  22-43 
bills  of  materials,  36 

designating  and  arranging  materials,  31-33 
inventories,  22,  23,  38-43 

reconciling,  40-43 
issuing  stores,  27-29,  37,  38 

Diagram,  29 
keeping  up  stores,  36-38 
production  order,  28,  30 
receiving  stores,  24,  26,  27 
stores  debit  notes,  30,  31 
stores  ledger,  33-35,  37-39 

Diagram,  34 
stores  records,  22-24 

relation  of,  to  commercial  books,  24,  25 

Diagram,  25 
stores  requisition,  27-29,  37,  38 

Diagram,  29 
tally  card,  35-37,  41 
Stores  debit  notes,  18,  30,  31 

effect  of  stores  debit  notes,  on  storekeeper's  records.  30,  31 
stores  in  excess  of  requirements,  30 
Stores  ledger,  16,  33-35,  37-39,  89,  90 

Diagram,  34 

apportionment  of  materials,  to  provide  for  work  in  advance,  35 
form  of  stores  ledger,  33-35 
Diagram,  34 


INDEX  101 

Stores  records,  15-19,  22-24 

cost  systems,  differences  in,  24 

cost  systems,  accurate,  working  of,  23 

inventory,  physical,  23 

inventory  as  starting  point  to  show  cost  of  materials  consumed, 
22 

subsidiary  records,  distinction  of,  in  cost  accounting  system,  22 
Stores  records,  relation  of,  to  commercial  books,  24,  25 
Diagram,  25 

measuring,  accurate  method  of,  necessary,  24 
Subsidiary  records,  importance  of,  22 
Superintendent's  salary,  apportionment  of,  80 
Supplementary  rate,  idle  time,  83-85 
Supplies  and  sundries,  81 
System,  cost  (See  "Cost  System") 

System,  decimal,  of  designating  and  arranging  materials,  31-33 
Systems  of  paying  wages,  49,  51-54 

piece  work  plan,  49,  51 

Taylor  premium  plan,  52-54 

Towne-Halsey  plan,  51,  52 

T 
Tally  card,  35-37.  4* 

balance,  should  be  in  accord  with  stock  on  hand,  36 

definition  of  tally  card,  35 
Taylor  premium  plan  of  wage  payment,  52-54 
Time  recording  devices,  48,  49,  55-59 

card  time  clock,  48,  49,  55 
illustration  of  operation,  56 

comparison  of  job  cards  with  labor  cards,  58 

failure  of  foreman  to  provide  work  in  advance,  58,  59 

finished  jobs  cards,  collected  by  foreman,  58 

operation  on  job,  suspension  of,  58 

relation  of  time  cards  to  work  tickets,  49,  50 
Diagram,  50 

time  cards,  49,  55-61 

Time  recording  methods,  45-50  (See  also  "Recording  time") 
Time  supplementary  rate,  83-85 
Towne-Halsey  plan  of  wage  payment,  51,  52 

V 

Values  in  manufacturing,  conversion  of,  19,  20 
factory  work,  progress  of,  19,  20 

Diagram,  20 
Voucher,  stores  (See  "Requisition,  stores") 


102  INDEX 

W 

Wage  payment,  piece  work  system,  49,  51 
Wage  payment,  Taylor  premium  plan,  52-54 

advantage  of  plan,  54 

dismissal  of  workman,  54 

efficiency,  to  lessen  time  consumed,  54 

elements  of  work,  52,  53 

example  of  plan,  53 

inducements  of  plan,  54 

time  consumed,  measurement  of,  52,  53 
Wage  payment,  Towne-Halsey  plan,  51,  52 

example  of  plan,  52 

record  of  quickest  time  as  standard  for  work,  51 

task,  assigned,  accomplished  in  time  less  than  standard,  51,  52 

weakness  of  plan,  52 
Wages,  watchmen's  and  caretaker's,  81 
Waste  and  leakage,  8,  21,  87 
Workmen,  paying  the,  60,  61 

envelope  system,  alleged  shortages  occurring  under,  61 

envelope  system,  expense  increased  by,  61 

time  cards,  as  basis  for  payroll,  60 

time  cards,  collection  of,  at  end  of  each  week,  60 

total,  shown  by  payroll,  basis  for  cash  book  entry,  60 
Work  tickets,  49,  55  59 

relation  of  time  cards  to  work  tickets,  49,  50 
Diagram,  50 


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Graduate  School  of  Business  Administration 

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